Advice please--stop 401k contributions?

[jandj]

My husband and I plan to buy a house at the end of the year so we have been trying very hard to get all credit card debt paid off (we will keep balances of less than $100 on each card).  We have about $4000 left to go and currently we are able to put about $550/month towards the credit cards (2 cards left).  Should we temporarily stop our 401k contributions and use the extra cash to get the cards paid down faster or is that a bad idea?  It would give us an additional $450 per month.....if we decide to stop contributions I would put a 3 to 4-month limit on it.  Thanks!

[reily28]

Its only for a short time. I think I would, if it got me a new home.

[Boswd]

or just lower your percantage of takeout to the 401k to the min. that way you will still have some money going in to your 401k and at the same time free up a little extra.

[jandj]

That's a great idea, I'll probably take your advice and just lower the percentage so it's not completely stopped.  There's probably more paperwork and hassle involved to get it started back up than there is just to increase and decrease the percent.  Thanks!

[MidnightVoice]

Does your company do any matching?  If it does, you might be really losing money.  And taxes go up as well, as you will have less tax deductions.

[jandj]

Yeah, both of our companies have matching and obviously we like the tax deduction so that's why I'm not sure what the best thing to do is.  This would be our first home to buy so I just want to start with a clean slate and not have any cc debt (just 1 car loan and student loans).  This is also why I would definitely put a time limit on how long the contributions were stopped.  I'm not sure what to do....totally open to suggestions!

[MidnightVoice]

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jandj wrote:

Yeah, both of our companies have matching and obviously we like the tax deduction so that's why I'm not sure what the best thing to do is.  This would be our first home to buy so I just want to start with a clean slate and not have any cc debt (just 1 car loan and student loans).  This is also why I would definitely put a time limit on how long the contributions were stopped.  I'm not sure what to do....totally open to suggestions!

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First I would calculate how much money you will lose in both company contributions and tax reduction. 

Then calculate how much the reduced contributions would be woeth when you retire, and how long it will take you to replace that money 

Calculate how much interest you are paying on the debt

The figure out how long it is going to take for the scores to go up and if this will affect your mortgage rate.

This might give you a feel for relative costs

[UnderEstimated]

I'm not sure how much you are contributing to your 401K, but I've been contributing 8%.  When I cut back to 3% (to save some money) my net pay only increased by $6.XX.  I was definitely losing money by doing that.

Message Edited by UnderEstimated on 05-18-2007 08:07 AM

[Anonymous]

I'm a tax practitioner, however, due to the nature of the forum, I can't give actual advice. Please bear with me if I sound generic.

Once the year ends, your entitlement to put tax-free money into a 401(k) for that year will end. You won't be able to "catch up" - replace tax free money with tax free money - later.

Now here's something both counter-intuitive and relies heavily on your ability to be disciplined. If you are eligible to take a 401(k) loan from your 401(k), you can pay off your credit card debt. I have not seen any plans that report, so the loan would not appear on your credit reports. Also, many plans have special terms for to first time home buyers for these loans.

The proceeds are not subject to taxation. The big benefit is that you can use the money and replace it over time so that it retains its tax free status. Your costs are regular interest and any loss of investment growth over the repayment period. These loans are almost always repaid with payroll deduction.

Let me emphasize: these are loans. A failure to pay them back will trigger full taxation of the money AND penalties. These loans are secured by your contributions. Also, a change of jobs, or a default of more than 30 days, will trigger the repayment requirements. The tax code puts all the flexibility into the ability to take the loan and is unforgiving about the repayment rules.

I would strongly recommend talking to your tax adviser. Also consider if this is practical for your budget.

Hope this helps.

Message Edited by VA_Tax_Geek on 05-18-2007 08:31 AM

[Anonymous]

I agree with everyone else. See what ends up making you the most. Just remember that the 401k money is going to (as long as it performs well) give you positive returns for many many years. Make sure to always budget well so nothing affects your 401k.