Old (small) 401k account - use it to pay debt or roll it over? - Mothering Forums

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#1 of 10 Old 02-01-2006, 05:38 PM - Thread Starter
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Hi! DH has a small amount of money in a 401k from a company he no longer works for. We are not currently contributing to it and, obviously, neither is his old employer and the money is just sitting there. We were planning on rolling it over to an IRA and then converting the IRA to a Roth IRA. But we also have a fair amount of credit card debt and I was wondering if any of you wise mamas think it would be better to roll it over and continue saving or cash out of it and pay down the credit card debt. Our credit card interest rates are higher than the interest rate on account so we are accruing more interest on our debt than we are on the money so I'm tempted to say we should cash out and pay down our debt. But I've read that you should never cash out because of the loss we'd take through taxes we'd have to pay on the money etc. etc. What do you all think?
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#2 of 10 Old 02-01-2006, 09:48 PM
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I vote pay down debt. But I know that the "experts" would tell you to roll it over. However, if your 401k is in the stock market, you're really gambling with that money. Paying off debt would be a sure thing.

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#3 of 10 Old 02-01-2006, 10:05 PM
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I would roll it over and invest it in an S&P 500 index fund. You'll take a tax hit on it if you withdraw and also, you won't have it as a start on retirement planning and savings. Just MHO.

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#4 of 10 Old 02-01-2006, 10:26 PM
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As far as the tax hit, it depends on the amount of the IRA and if it would throw you into another tax bracket since it will count as income at the end of the year. There are penalties for early w/d, but if you fall into one of the exemption catagories than you can avoid the penalties. I withdrew a small IRA to help out with expenses when I first became a SAHM, but I also re-enrolled in school and was able to claim education expenses and avoid penalties. There is also an exemption for first home buyers for up to $10,000. Medical expenses are exempt. There are a few others, but you have to show where you paid for the exemption adn the money could have been used for that reason.

You may have to account for the highere taxes, but since it is early in teh year you could change you exemptions or just take a bit of teh money off the top for later. The usual penalty for middle income folks ends up being 20-25% off the amount of the IRA.

If this is not your primary retirement, you are young enough and are contributing at least 10% of your income to your current IRA, I would use this for debt. Are you saving for any dc's college? That may also be a consideration, rolling it into a 529 account.


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#5 of 10 Old 02-01-2006, 10:31 PM
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Roll it into a regular IRA, not a Roth IRA. In general, all available money should go towards debt, with one big exception - tax deferred retirement savings. You should even keep contributing to those when in deep debt, especially when your employer has a match. I don't know if you have a 401K available to you now, but you should be contributing if possible.

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#6 of 10 Old 02-02-2006, 12:37 AM
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I was faced with the same question 9 years ago when I was 27. Given our income, the fact that it would be rising, and the fact that DH had a nice 401k with company match we decided to use mine to pay off debt. We did pay the tax penalties. I actually emailed with Mary Hunt about this. I'm not saying she would give everyone the same advice.
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#7 of 10 Old 02-02-2006, 09:26 PM
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PLEASE ROll it over. we cashed out a 401k, it hit us soooo hard. FIrst, there was the 10 or so percent taken out before we even got the check. Then it was an additional 10% income tax, plus the regular tax for our tax bracket (and the withdraw was small, but large enough to bump us into the next tax bracket), and then a 10% early withdraw penalty. YOu can take a loan out on it instead. Good luck!


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#8 of 10 Old 02-02-2006, 11:41 PM
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Figure out how much you'd lose in penalties and taxes, and then figue out whether the reduced interest you'd be paying on the loans would make up for it.
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#9 of 10 Old 02-03-2006, 12:28 PM
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Roll it over. Long term, you will come out MUCH more ahead.
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#10 of 10 Old 02-04-2006, 10:13 PM
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I vote roll it over. I did this last fall fearing we were to hit max on credit cards, so I paid some down. The hit from taxes I'm filing now is SO surprising. Not just taxes owed, but as a previous poster noted, being bumped into a different bracket has taken away $$$$ we received last year with EIC and other credits. It has almost equalized the deal! The money I cashed out last year was nearly the amount we lost in low income tax credits now. I just threw money off a bridge, essentially.
If anything, try to write up a fake tax return to forecast what your income will look like, and what tax bracket you fall into. Or ask the advice of a professional if you can afford to have someone look at your particular financials.
I feel a major OOPS about what I did (sigh).
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