Author Topic: Using a 401(k) to clear debt and start (re)saving/investing  (Read 1456 times)

bigkid70

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Using a 401(k) to clear debt and start (re)saving/investing
« on: August 07, 2015, 08:29:22 PM »
Hi,

I'm new to MMM, but the philosophy has definitely struck a chord. I plan on making some major changes to my spending saving habits to start aggressively paying down my two major debts: one credit card @ ~25K (3.74% interest rate) and my school loans @ ~31K (~5% interest). My question is this:

Is it worth considering taking the money I need to pay off these balances out of my 401(k)? I know I'd take a heavy hit for the early withdrawal, but my rationale is/was I could use the money freed up each month from no longer having those payments to build the 401(k) back up (or put that money, plus more, into some other investment vehicle).

Is this just a terrible idea?

Gin1984

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Re: Using a 401(k) to clear debt and start (re)saving/investing
« Reply #1 on: August 07, 2015, 08:30:03 PM »
Yes it is a terrible idea.

Mr. Green

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Re: Using a 401(k) to clear debt and start (re)saving/investing
« Reply #2 on: August 07, 2015, 08:31:11 PM »
Yes it is a terrible idea.
+1. It will do more damage than good.

Zx

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Re: Using a 401(k) to clear debt and start (re)saving/investing
« Reply #3 on: August 07, 2015, 09:23:56 PM »
I agree that it isn't a smart idea. My wife and I did that a couple years back, before we found this way of life (I came to it through Jeremy and Winnie).

We took 24k out, paid off everything. In six months we had 20k in cc debt again PLUS we got hammered on taxes. So no, don't do it!

GetItRight

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Re: Using a 401(k) to clear debt and start (re)saving/investing
« Reply #4 on: August 08, 2015, 12:50:33 AM »
Don't touch your 401k for a 5% or less debt. I took a 401k loan to pay off a large chunk of 14% student loans which enabled me to qualify to refinance the rest of my high interest student loans at a much lower rate. This has saved me well over $10k in the past year. I didn't withdraw the money as I'd rather pay money to a private bank than government. My net worth has increased over 30k in the past year and I've paid off my high interest government student loans. Without doing the 401k loan I'd never have made this much progress. Yes touching your 401k can work, but only for high interest debt and if you are serious about becoming and staying debt free. Outright early withdrawals are a bad idea as it just makes the government richer, which is annegative for society. A loan is better, for your own fiances and society as a whole.

slugline

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Re: Using a 401(k) to clear debt and start (re)saving/investing
« Reply #5 on: August 08, 2015, 06:06:29 AM »
No, don't do this.

(1) Do you really lack confidence that your 401(k) investments will beat 5% return over the long term?
(2) Did you know that in the event (however unlikely it seems now) that you must declare bankruptcy, your retirement accounts are shielded from creditors? Why give that up that protection?

bigkid70

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Re: Using a 401(k) to clear debt and start (re)saving/investing
« Reply #6 on: August 08, 2015, 03:08:09 PM »
Thanks to all who replied, especially those that offered some rationale/reasoning for their opinion.

I think I knew instinctively that one shouldn't take money out of their 401(k) to pay off other things, but I'm learning as I go, so I like to better understand why it's a bad call.

A.

cheddarpie

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Re: Using a 401(k) to clear debt and start (re)saving/investing
« Reply #7 on: August 08, 2015, 03:51:57 PM »
As everyone else said, NOOOOOOOooooooo.

1) Major financial penalties for early withdrawal
2) Retirement is the ONLY life event you can't borrow for. While I'm not a fan of debt generally, it can be a useful tool when you need it (e.g., mortgage, school). But if you need it for retirement, it won't be there, unless you plan to finance your retirement with credit cards, which is an even worse idea.

forummm

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Re: Using a 401(k) to clear debt and start (re)saving/investing
« Reply #8 on: August 08, 2015, 06:43:28 PM »
Those are pretty low interest loans. I would rein in your spending until you can max out your 401k contributions ($18k/year), an IRA ($5500/year) and pay off your loans too!

And taking the money from your 401k is a terrible idea. As I say, you should be putting money into it instead.