401k advice

Bump ....
Ending my employment and have a 401k waiting to be redistributed.

Would it be worth it to cash out the 401k, take the penalty and use the use the money to pay off debit? Particularly credit card debt.
We have CC debt with interests rates between 18-22 percent. Isn't that about the same penalty I'd pay for cashing out the 401k?


Or continue on the present course; move my 401k into a Vanguard account or my wife's Vanguard and continue making monthly payments on the CC balances?

 

I can't ever see this being a good idea.

 

You're going to pay a 10 percent penalty and the income tax at the going rate, so you're going to be giving at least 35 percent of that money to Uncle Sam. I don't know what your tax bracket is, but it counts as income, so it probably will push your marginal tax rate higher than it otherwise would be.

You have two not-great choices and I don't know the specifics, but I wouldn't withdraw the 401k.

 

Keep the money in the 401(k).

Once it is redistributed wherever that may be (preferably another 401(k)), TAKE A LOAN from your 401(k) and use that to pay off your CC debts.

The principal and interest you will incur to pay off that 401(k) loan you will be paying TO YOURSELF.

 

Can he borrow against that 401k if he isn't employed at that place anymore? I would think not, since you normally have to pay back a loan immediately upon the end of your employment, but maybe there's a loophole.

 

Depends on how much is in your 401(k). When you cash it out, they'll hold back about 20 percent. Then you have to pay taxes on the money you do get.

 

No, that's what I meant when I said "preferably another 401(k)", presuming he would be working somewhere else with a 401(k) plan that he could roll his current money into.

That's pretty much the only option WRT a loan. Can't take a loan from a plan of a company you are not employed with, and can't take one from an IRA (longer than 60 days, anyway).

 

OK, yeah, I see what you're saying.

Can't say I'd be a huge fan of borrowing against the 401k at the new company. You wouldn't know if the job is going to pan out and you might end up buying yourself more trouble. Also that loan payback and interest are after-tax, so it's a nice savings plan but not really an advantage in taxes or vs. any other investment vehicle; you get the same benefit and more liquid cash with a disciplined approach in a brokerage account.

 

No, it's not something you'd do for tax or investment reasons.

Just something you might do because paying 8 percent interest to yourself beats paying 22 percent to Visa.

 

8 percent? I took out a $3000 loan against a 401(k) and only paid $100 in interest.

 

And that's what I need to determine; If the hit to the 401k - including taxes is less than, equal to or worse than maintaining the current debt, interest rate and APR.

Honestly, If it's close I think it would be worth it to pay off the CC debt.

We have two 401ks; Mine and the wife. We also have a vanguard account.
My new employer has no 401k and I will prolly roll my 401k into a Vanguard account, but I want to compare it to the idea of paying off the CC debt.
We are moving - either buying a new house or land on which to build and considering options to pay off the CC debt to improve the credit score for the next round of loans.
Thanks for the advice and suggestions.

 

Last 401(k) loan I took out was in 1999. Obviously the numbers are different today. But the great thing is . . . it doesn't matter. Whatever interest you are paying --- 1 percent or 11 percent ---- you're paying to yourself.