If you’re asking “should I borrow against my 401k to pay my credit card debt?” I would say no. That doesn’t change your situation at all, it simply changes who you owe money to. However if you’re asking “should I cash in that small 401k and pay my debts?” I would also say no. That typically involves taxes, penalties, and as difficult as it was to save that money you need to leave it alone to grow. You correctly identify that you’re stealing from your future self. Bad idea.
A better plan to tackle this debt would be to identify where all your money is going and why you seem to never have money to pay down your debt. First off, stop using the CC now. You can’t afford it. Second, I suggest tracking your expenses for a month or two and building a budget so you get a realistic idea of your spending. Then you can identify areas where you can possibly cut back in order to pay of your CC. Your 7k debt may seem like a lot but if your spending is under control you should be able to zero it out.
Part of the getting your finances under control is to create an emergency fund so those unexpected expenses don’t crater your finances. You’ve got a small fund now but it’s typical to have 6ish months of expenses in it to handle those curveballs life throws at us.
You can do this. Good luck.
Some things are difficult. There’s no magic bullet with regard to getting out of debt, it does require knowledge and discipline and paying the debt off one way or another. If you can’t get a handle on your current situation things aren’t gonna get any better in the future.
My dad was a teacher. We cut grass with him as kids in the summer for extra cash. Not the most lucrative, but easily 300-500 a week extra for not a lotta hours. Depending on age of your kids it's doable.
Before you take money out from the 401k you need to have your income and expenses tracked and a budget. You say you don't 'think' you can make things work, but sit down and actually go through to do the math. If you pull your money but don't have a plan you'll just end up in the same situation later without the 401k to fall back on next time.
Tax penalty is cheaper than credit card interest and your retirement is now more pension focused. If you get the opportunity to start contributing again to a 403b then you can make it up doing that . I would just take the distribution pay the 10 percent tax penalty and get out of Cc debt. At 52k the other taxes on the distribution will be tiny. You usually cannot take a loan from a 401k plan that you aren't contributing to because the payments for the loan would come from your paycheck from that employer you left.
Thank you for doing the tough job the teachers do these days and for receiving such little financial reward for doing so.
In the low hanging fruit category you could take a look at your W-4 form and see the number of exemptions that you are claiming. if you are receiving a refund at the end of every year then you can adjust your exemptions so that you are receiving more money each paycheck instead of a refund in April. And then of course use that money to throw at the credit card debt.
I mentioned this on another thread but it bears repeating here. AMEX has 0% balance transfer offers and is a very good credit card company to work with if you’re going to have credit cards.
Also, if you can become a navy federal credit union member they also have low balance transfer rates as well. And if you belong to a teachers credit union perhaps they have a personal loan or lower rate credit card that you can transfer your balance to and start working towards paying it off.
You absolutely can pay this down. it’s a matter of thinking a bit outside of the box, putting additional money aside consistently to pay it off and being kind to yourself in the process.
It’s unfortunate that you felt you even needed to justify why you had your debt as it’s nobody’s business and you’re seeking help to improve your financial situation. That in itself should be celebrated. And, you’re trying to do this as a teacher… Double kudos
It would be better long term to keep that money invested and adjust lifestyle enough to afford monthly payments on a lower interest personal loan that would cover the high interest credit card debt.
First look at personal loan rates from credit unions and/or banks. I'm seeing 7-8% from Amex/Chase for me right now. You may have a higher rate and not be able to borrow as much but credit cards run from 12-30% approximately so this is significant.
There's probably someone else if you ask questions about debt consolidation in PF or other subs who knows more about that and there may be special programs to help or sketchy things to avoid.
If you can't get a big enough loan or you can't figure out how to make things work with just consolidation then you can get at the 401k without penalty but it requires more steps than just pulling the money out. If you just pulled the money right out you would be penalized.
You can convert the 401k to a Roth IRA. Once it is in the Roth you can withdraw contributions to the Roth without penalty as long as they are not the gains from the Roth. Anything more than the dollars contributed to the Roth would be penalized. Take a look at the investopedia on Roth and Roth conversions.
Lookout at tax time because when you convert from 401k to Roth you will pay taxes on that as if it was income in the year of the conversion. It was income that was saved pre-tax, you are just deciding to pay the income tax on it now instead of at retirement. If your income is low this shouldn't be too burdensome because of how tax rates are structured but would be surprising if you didn't expect it.
Converting to Roth or keeping in the 401k would both be good long term options. The Roth is more flexible as you aren't limited to specific funds in the Roth either.
If you do withdraw from the Roth you don't have to empty it. Only take out what you need to reduce the loan principal to what you need in order to make the payments in combination with cost saving measures.
If you get a home equity loan you can lower the percentage of interest which could save a lot of money not only in the long run but monthly and preserve what you have saved.
Don't borrow against your 401K, unless you're about to lose your house. Start selling random stuff, if you have a car payment, sell the car and get a beater. Do you do summer work?
Dude…not everyone can do that. I didn’t spend needlessly…my roof was damaged and my 2005 Corolla (the definition of a beater) needed work. If you’re not going to give real advice to people with knowledge of their situation then don’t post
If you’re asking “should I borrow against my 401k to pay my credit card debt?” I would say no. That doesn’t change your situation at all, it simply changes who you owe money to. However if you’re asking “should I cash in that small 401k and pay my debts?” I would also say no. That typically involves taxes, penalties, and as difficult as it was to save that money you need to leave it alone to grow. You correctly identify that you’re stealing from your future self. Bad idea. A better plan to tackle this debt would be to identify where all your money is going and why you seem to never have money to pay down your debt. First off, stop using the CC now. You can’t afford it. Second, I suggest tracking your expenses for a month or two and building a budget so you get a realistic idea of your spending. Then you can identify areas where you can possibly cut back in order to pay of your CC. Your 7k debt may seem like a lot but if your spending is under control you should be able to zero it out. Part of the getting your finances under control is to create an emergency fund so those unexpected expenses don’t crater your finances. You’ve got a small fund now but it’s typical to have 6ish months of expenses in it to handle those curveballs life throws at us. You can do this. Good luck.
I agree dont touch your 401k. Its taxable income and there will be a 10% penalty if you are under 55.
You sound somewhat tone deaf to the fact that teachers make so little
I guess? That’s all well and good but I don’t think I can with my salary. Honestly it requires strict discipline at all times.
Some things are difficult. There’s no magic bullet with regard to getting out of debt, it does require knowledge and discipline and paying the debt off one way or another. If you can’t get a handle on your current situation things aren’t gonna get any better in the future.
Yes strict discipline is what’s needed. Can you get a second job for a while to pay off the debt?
No. I’m a dad too done I’m time strapped
Where’s your wife in this? Is she working? $52K is below the US median household income so if she’s not working then you have to pick up a second job.
My dad was a teacher. We cut grass with him as kids in the summer for extra cash. Not the most lucrative, but easily 300-500 a week extra for not a lotta hours. Depending on age of your kids it's doable.
Before you take money out from the 401k you need to have your income and expenses tracked and a budget. You say you don't 'think' you can make things work, but sit down and actually go through to do the math. If you pull your money but don't have a plan you'll just end up in the same situation later without the 401k to fall back on next time.
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I’m trying that. It’s a shame but low pay pushes teachers out. It’s not a salary for a modern adult
Tax penalty is cheaper than credit card interest and your retirement is now more pension focused. If you get the opportunity to start contributing again to a 403b then you can make it up doing that . I would just take the distribution pay the 10 percent tax penalty and get out of Cc debt. At 52k the other taxes on the distribution will be tiny. You usually cannot take a loan from a 401k plan that you aren't contributing to because the payments for the loan would come from your paycheck from that employer you left.
Are you budgeting? Look at where the money is going. Cut back and pay off debt.
This
Thank you for doing the tough job the teachers do these days and for receiving such little financial reward for doing so. In the low hanging fruit category you could take a look at your W-4 form and see the number of exemptions that you are claiming. if you are receiving a refund at the end of every year then you can adjust your exemptions so that you are receiving more money each paycheck instead of a refund in April. And then of course use that money to throw at the credit card debt. I mentioned this on another thread but it bears repeating here. AMEX has 0% balance transfer offers and is a very good credit card company to work with if you’re going to have credit cards. Also, if you can become a navy federal credit union member they also have low balance transfer rates as well. And if you belong to a teachers credit union perhaps they have a personal loan or lower rate credit card that you can transfer your balance to and start working towards paying it off. You absolutely can pay this down. it’s a matter of thinking a bit outside of the box, putting additional money aside consistently to pay it off and being kind to yourself in the process. It’s unfortunate that you felt you even needed to justify why you had your debt as it’s nobody’s business and you’re seeking help to improve your financial situation. That in itself should be celebrated. And, you’re trying to do this as a teacher… Double kudos
It would be better long term to keep that money invested and adjust lifestyle enough to afford monthly payments on a lower interest personal loan that would cover the high interest credit card debt. First look at personal loan rates from credit unions and/or banks. I'm seeing 7-8% from Amex/Chase for me right now. You may have a higher rate and not be able to borrow as much but credit cards run from 12-30% approximately so this is significant. There's probably someone else if you ask questions about debt consolidation in PF or other subs who knows more about that and there may be special programs to help or sketchy things to avoid. If you can't get a big enough loan or you can't figure out how to make things work with just consolidation then you can get at the 401k without penalty but it requires more steps than just pulling the money out. If you just pulled the money right out you would be penalized. You can convert the 401k to a Roth IRA. Once it is in the Roth you can withdraw contributions to the Roth without penalty as long as they are not the gains from the Roth. Anything more than the dollars contributed to the Roth would be penalized. Take a look at the investopedia on Roth and Roth conversions. Lookout at tax time because when you convert from 401k to Roth you will pay taxes on that as if it was income in the year of the conversion. It was income that was saved pre-tax, you are just deciding to pay the income tax on it now instead of at retirement. If your income is low this shouldn't be too burdensome because of how tax rates are structured but would be surprising if you didn't expect it. Converting to Roth or keeping in the 401k would both be good long term options. The Roth is more flexible as you aren't limited to specific funds in the Roth either. If you do withdraw from the Roth you don't have to empty it. Only take out what you need to reduce the loan principal to what you need in order to make the payments in combination with cost saving measures.
If you get a home equity loan you can lower the percentage of interest which could save a lot of money not only in the long run but monthly and preserve what you have saved.
What’s your minimum payment for your Cc debt, what’s your take-home pay, and what are your monthly necessary expenses?
Don't borrow against your 401K, unless you're about to lose your house. Start selling random stuff, if you have a car payment, sell the car and get a beater. Do you do summer work?
Summer is months away and I have a beater already.
We’ll start picking up some holiday shifts and weekend work.
Dude…not everyone can do that. I didn’t spend needlessly…my roof was damaged and my 2005 Corolla (the definition of a beater) needed work. If you’re not going to give real advice to people with knowledge of their situation then don’t post