Author Topic: Borrow from 403(b) to pay credit card debt  (Read 5232 times)

Carini

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Borrow from 403(b) to pay credit card debt
« on: November 02, 2016, 07:47:46 AM »
I've gotten myself into some pretty serious credit card debt. This wasn't frivolous shopping or vacations. Most was serious home and car repair over the years, and I haven't caught up enough to pay it back. I'm considering borrowing from my 403(b) to pay it off. We're talking about 8k.  Right now, I'm paying a total of 230/month in minimum payments to pay all of the different cards. I can borrow 8k from my 403(b) at a MUCH lower interest rate (3.9%)  and my monthly payment would be 180/month. 

So it reduces my monthly payment and drastically changes the amount of interest I will pay in the long run. I also continue to earn interest on the full amount of my retirement account because they set up a separate collateral account for the loan that also earns 3% during repayment. I've checked all of the terms with my employer and even if I leave this job, the terms and loan repayment stay exactly the same. No penalty for leaving this employer.

I'm at least 25 years from retirement. Tell me why I shouldn't do this??  Thanks.


Enigma

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Re: Borrow from 403(b) to pay credit card debt
« Reply #1 on: November 02, 2016, 09:06:17 AM »
If you are going to borrow against your 403(b) to pay off your credit card then you should be paying the same amount $230/month or more...  $400/month...  $500/month.  It is not wise to reward yourself with increased income because of bad debt and debt restructuring.

In reality you should just pay every dime that isn't bolted down until the debt is completely gone.  Stop the mindset of minimum payments and now I get to pocket $50/month.

Carini

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Re: Borrow from 403(b) to pay credit card debt
« Reply #2 on: November 02, 2016, 09:25:04 AM »
If you are going to borrow against your 403(b) to pay off your credit card then you should be paying the same amount $230/month or more...  $400/month...  $500/month.  It is not wise to reward yourself with increased income because of bad debt and debt restructuring.

In reality you should just pay every dime that isn't bolted down until the debt is completely gone.  Stop the mindset of minimum payments and now I get to pocket $50/month.

I get your point about not rewarding yourself because of bad debt, but that wasn't what I meant. I was just pointing out that the payments per month would be less on top of all the interest that would be saved.  I wasn't jumping up and down about the extra 50 dollars per month. I definitely agree that I should still pay as much per month as possible to pay down the loan if I take it. 


plog

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Re: Borrow from 403(b) to pay credit card debt
« Reply #3 on: November 02, 2016, 09:27:13 AM »
Not to get all Dave Ramsey on you, but this isn't a math problem, it's a behavior problem. 

The biggest reason not to do this is because people are horrible at breaking habits--smoking, drinking, relying on credit cards.  Now, if you are a few years into credit card sobriety and have an emergency fund to handle future unforseen expenses, then it would be okay to do this. If you woke up 2 weeks ago and just swore off credit cards then, well you probably shouldn't do this.   

seattlecyclone

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Re: Borrow from 403(b) to pay credit card debt
« Reply #4 on: November 02, 2016, 09:59:40 AM »
Mathematically, this makes sense. Credit card interest rates are astronomical. Using money you already have to pay it off will put you in a better position than letting the debt ride.

However it does seem like you failed to account for home and car repairs in your budget. This is a problem you will need to fix going forward. You never know which part of your car or home will need repair in a given year, but maintenance of some sort is a near certainty. You need to plan for it just the same as any other spending.

frugaliknowit

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Re: Borrow from 403(b) to pay credit card debt
« Reply #5 on: November 02, 2016, 10:05:00 AM »
No, no, no, let me repeat NO!

I understand the math, but consider:

1.  If you leave your employer, most likely that loan is due (assuming it's the same rules as a 401K), or it will be treated as a withdrawl (10% plus your tax rate).  Living your life contingent on not changing jobs is no way to live.

2.  You Sir or Mam (tough hug coming), have a spending problem.  You need to have a budget which includes car repairs (or whatever caused this mess) so this doesn't happen again.  Tough it out and pay it off.  No eating out (and whatever else needs to be done to cut your expenses) until this is paid off.

3.  Establish an appropriate emergency fund to avoid problems like this in the future.

Dicey

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Re: Borrow from 403(b) to pay credit card debt
« Reply #6 on: November 02, 2016, 10:19:04 AM »
What frugaliknowit said, plus this:
You are borrowing untaxed dollars and repaying them with after tax dollars. When you withdraw those same dollars from your 403b, you  will have to pay tax on them again. Skews that "3.9 %" interest rate.

You created the debt, I'd live with the discomfort as a reminder to do better in the future. Using your future to absolve your current decisions is risky beyond what you've considered.

With This Herring

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Re: Borrow from 403(b) to pay credit card debt
« Reply #7 on: November 02, 2016, 10:19:50 AM »
I've gotten myself into some pretty serious credit card debt. This wasn't frivolous shopping or vacations. Most was serious home and car repair over the years, and I haven't caught up enough to pay it back.
*snip*

Did you do any frivolous spending or vacations at all during this period?  Did you go to restaurants, bars, gyms, tanning salons, or buy non-essential clothes/cosmetics/electronics/power tools/your widget of choice?  Even if you paid via check or cash?  Money is fungible, so that credit card debt is due to all of your purchase choices over that time period, not just the specific charges that make up the balance.

What has changed in your habits and your life that will prevent you from getting in credit card debt again?  Do you have a substantially higher salary now?  Have you cut down or cut out non-essential spending?  Going forward, does your budget have a good savings rate to build up a good emergency fund and invest?

If you really have changed and think you can pay back the debt within a year if the interest is cut, you can look into doing a balance transfer to a temporarily 0% credit card.  It might also help you to get a side job to help pay down that $8K ASAP.

Carini

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Re: Borrow from 403(b) to pay credit card debt
« Reply #8 on: November 02, 2016, 11:37:45 AM »
No, no, no, let me repeat NO!

I understand the math, but consider:

1.  If you leave your employer, most likely that loan is due (assuming it's the same rules as a 401K), or it will be treated as a withdrawl (10% plus your tax rate).  Living your life contingent on not changing jobs is no way to live.

2.  You Sir or Mam (tough hug coming), have a spending problem.  You need to have a budget which includes car repairs (or whatever caused this mess) so this doesn't happen again.  Tough it out and pay it off.  No eating out (and whatever else needs to be done to cut your expenses) until this is paid off.

3.  Establish an appropriate emergency fund to avoid problems like this in the future.

I'm not arguing with your overall advice, but I do need to correct your #1 point which is very important. It is not the same rules as a 401(k) and I have done the research with TIAA CREF and my employer that is is not due if I change jobs, and it is definitely not taxable unless I default on it. 

Carini

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Re: Borrow from 403(b) to pay credit card debt
« Reply #9 on: November 02, 2016, 11:40:53 AM »
What frugaliknowit said, plus this:
You are borrowing untaxed dollars and repaying them with after tax dollars. When you withdraw those same dollars from your 403b, you  will have to pay tax on them again. Skews that "3.9 %" interest rate.

You created the debt, I'd live with the discomfort as a reminder to do better in the future. Using your future to absolve your current decisions is risky beyond what you've considered.


It's a loan and not a withdrawal. I will not being paying taxes on them unless I default on the loan. I've already confirmed this.  I get what you mean by borrowing untaxed dollars, but paying back this amount at 3.9% versus 13-17% still makes sense mathematically, doesn't it?

vivophoenix

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Re: Borrow from 403(b) to pay credit card debt
« Reply #10 on: November 02, 2016, 12:56:45 PM »
What frugaliknowit said, plus this:
You are borrowing untaxed dollars and repaying them with after tax dollars. When you withdraw those same dollars from your 403b, you  will have to pay tax on them again. Skews that "3.9 %" interest rate.

You created the debt, I'd live with the discomfort as a reminder to do better in the future. Using your future to absolve your current decisions is risky beyond what you've considered.


It's a loan and not a withdrawal. I will not being paying taxes on them unless I default on the loan. I've already confirmed this.  I get what you mean by borrowing untaxed dollars, but paying back this amount at 3.9% versus 13-17% still makes sense mathematically, doesn't it?



mathwise i would say yes, but is getting this debt restructured the only way you could speed up pay off ?


even before you take interest into account you have almost three years of debt, if you pay only $230 a month, from emergencies.

what emergencies occurred car and house wise that put you $8k in debt?


you could purchase a beater car for $500.


wouldn't a no interest balance transfer be a better choice?