Is it smart to use savings / 401 to payoff bills???

[Anonymous]

I already know the answer is no, but I was wondering if I cashed out the small amount I had to pay off a credit card or two and be done with them. I only have about $1,000 in my 401k which isn't drawing really any interest, it's in a holding account till I decide where I want to move it or combine it with a new 401k savings plan when I am eligible at my new job after 1 yr of service in June. After being laid off from my last job we had choice to cash it out or if it was $1,000 + move it to a holding account or with our bank. Any money left over I would put in a interest baring savings account.

Thanks for your advice!

[Junejer]

Warning: the penalties are hefty with this type of move. Granted, it's only $1,000, but hefty percentage-wise anyway.

[Anonymous]

There is a way to withdraw without penalty. You mentioned that you are laid off, correct? If you are also over 55, you can withdraw money from your 401k without penalty.

If you are not over 55 and laid off, I would not take money from the 401k to pay CC debt. Heed ByrdMan's wise words because the penalties are hefty even on $1000.

[iltph]

Here's an excerpt from Suze Orman's 2009 free book available for download on Oprah:

SITUATION: You want to take out a loan from your
401(k) to pay off your credit card debt.

ACTION: Do not do this. I know it is tempting, but
it is such a dangerous move. Anyone who has bee n
listening to my advice over the years knows I have
never approved of 401(k) loans because you end
up paying tax tw ice on the money you borrow. But
I can understand that if you are staring at an inter-
est rate of 30% on your credit card, you fi gure the
tax penalty  is worth paying.

Given what has happened to the economy, I
once again must say no. First, we are in the midst
of a severe recession. Th at increases the possibility  
that you will lose your job. I don’t care how valued
an employee  you are. No one is safe when a com-
pany is losing money, or can’t kee p operating be-
cause the credit crisis makes it impossible for the
fi rm to do business. We are all vulnerable in times
like these. And if you have an outstanding loan
against your 401(k) when you are laid off , you ty p-
ically must pay off  the loan within a short period of
time. Fail to do that and it becomes a withdrawal;
that means you owe tax on the entire amount im-
mediately and a 10% early-withdrawal penalty  if
you are under age 55 in the year you left  service.
And tell me exactly where you will get the money
for that. Not your credit card, that’s for sure.

An even bigger issue is that you nee d your 401(k)
for tomorrow. Use it today and what will you have
in retirement? Can’t think about that right now?
Excuse me, you can’t aff ord not to think about that.
And that brings me to the issue of bankruptcy. I
certainly hope this never happens to you, but in
the event you must declare bankruptcy, one silver
lining is that any money you have in a 401(k) or
IRA is protected. Th at is, you will not be required
to use your retirement savings to sett le your debts.
It is a permanent asset for you. Don’t blow it by
using the money to pay off  your credit card debt.

[YoungInvestor]

Is it smart to use savings? Yes

401k? No

The underlying issue is where did these bills come from; is it a lifestyle you cant afford? We all should be sitting down with our bills every so often and analysing what we have spent, why, and can we cut back on anything. Some people do this monthly, weekly, or even daily. I'm doing this now and thinking about whether or not I should renew my sirius radio subscription, brown-bag it more often, and cut back on some other expenses. It's not because I can't afford these, but these are all luxuries.

Live below your means and things will improve.

Next is paying off the bills. Pay off the highest interest rate first. This is usually a CC bill.

Finally, if you need money and you are currently unemployed, what are you doing to improve your situation? Job hunting? Collecting? Willing to work for less than what you think you are worth? Some money is better than nothing!

If you are collecting (and check with your own state's unemployment office first) you can legally work and make up to $150-$200 / week while still being eligible for unemployment benefits.

Good luck!

[Anonymous]

I know it's not the usual thought on this, but I go with paying down the CC, depending on things like your interest rate ands your age. I say this because:  1) The economy sucks and your 401k returns are likely to suck for a number of years anyway.  2)  Your CC interest is likely much higher over your repayment than your 401k returns even if you tack on penalties.  3)  Your CC intewrest is known, while your 401k returns are not.  How bad will it hurt financially to keep paying the 20% on your CC if the 401k drops more than it likely already has?

[Anonymous]

---

@Anonymous wrote:
I know it's not the usual thought on this, but I go with paying down the CC, depending on things like your interest rate ands your age. I say this because:  1) The economy sucks and your 401k returns are likely to suck for a number of years anyway.  2)  Your CC interest is likely much higher over your repayment than your 401k returns even if you tack on penalties.  3)  Your CC intewrest is known, while your 401k returns are not.  How bad will it hurt financially to keep paying the 20% on your CC if the 401k drops more than it likely already has?

---

This is kind of like trying to time the market.  This is pretty tricky to do.  If you miss a few days of great gain you miss out on a lot of the bounce back period..

If it's only $1000, wouldn't you be paying off that amount in a few months anyway?  Can you skip a few meals out to eat or skip starbucks or something?  Or stop contributing until you get your debt paid off, but leave what is already there, in the account.

[bobebob]

---

@iltph wrote:

[Here's an excerpt from Suze Orman's 2009 free book available for download on Oprah:

SITUATION: You want to take out a loan from your
401(k) to pay off your credit card debt.

ACTION: Do not do this. I know it is tempting, but
it is such a dangerous move. Anyone who has bee n
listening to my advice over the years knows I have
never approved of 401(k) loans because you end
up paying tax tw ice on the money you borrow. But
I can understand that if you are staring at an inter-
est rate of 30% on your credit card, you fi gure the
tax penalty  is worth paying.

. . . . ]

---

While I agree with the other reasons Orman stated, I have to dissagree with this one.

Let's say you take out a $500 loan on your 401k and spend it.  You've just spent $500 that you didn't pay taxes on.

You replace that money back into your 401k with $500 you paid taxes on.

Later, when you retire, you take that $500 back out of the 401k to spend it and you will have to pay taxes on it.

In the end, you will have spent and paid taxes on $1,000.

If you say you are paying taxes on that $500 twice, then you would have to admit that you are also "spending" that $500 twice as well.

To me, that looks like a wash.

It's still not the best idea beacuse you can take a beating in penalties if you are unable to pay it back due to losing your job.  And you will miss out on any growth while you are borrowing it.   But her first argument against it just grates against my logic.

[compassion101]

Suzie Orman lol

[Plc]

I had the same decision to make a few years ago. The penalties for cashing it out are really high so chances are you would not clear enough after penalties and taxes to pay off the cards you are hoping to pay off.  Find out exactly what you would receive after taxes and penalties and make sure you would receive enough to do what you are wanting to do. Then consider the interest rate on the cards and the likelihood of you paying that money back to yourself. Remember, saving for retirement is an investment in yourself!