Author Topic: Withdraw from Betterment to pay down new debt?  (Read 4714 times)

jenscaffidi

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Withdraw from Betterment to pay down new debt?
« on: April 25, 2016, 08:15:25 PM »
Hello mustaches of the world!

While I have been on a path to Peak Mustache for a few years now, last year I succumbed to a Sucka Consumer approach to not one, not two, but THREE friend weddings in locations that were not my hometown, and used a (low interest!) credit card to pay for the travel. After punching myself in the face a few times (and re-learning the lesson that I absolutely positively no-way-no-how can be trusted with credit cards), I started flinging huge chunks of dough at those balances every paycheck.

I know how to do this, having paid off my student loans in under a year thanks to the frugality tips and attitude adjustment I learned here. I'm on track to pay it all down by the end of the year.

But! Here is where I'm looking for advice: I've got about $4000 'stashed in a Betterment account, and about the same amount of debt on an 8% interest card (plus an additional $2400 on no-interest cards: the promotional periods are good until the end of this year). Should I withdraw that money and fling it at the balance, too?

Potentially complicating factor: rents in my area are rising, quickly. One not-great apartment complex raised its rates 30% in the past 21 days, and the trend is growing. This will affect me in the next month or two as I look for a new rental (my current place won't be an option for long), so the idea of getting some of that monthly obligation out of the way is MIGHTY attractive. In fact, when I do have to move, it's likely that I'll have to cut down my debt payments considerably, which would extend my payoff time into the middle of next year. Yuck.

I've had my Betterment account for about a year and a half (I started contributing to it as soon as my student loan was gone) and I've never made a withdrawal, so I'm unclear on potential penalties or taxes or whether this is a terrible idea. It is not a retirement account, per se, just my first experiment with investing (with the long-term goal of financial independence).

My apologies if there is already a thread for this: I never have much luck with the search here. Please feel free to point me to any existing advice. And punch me in the face! (I've learned my lesson though, I promise.)

GrowingTheGreen

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Re: Withdraw from Betterment to pay down new debt?
« Reply #1 on: April 26, 2016, 10:47:26 AM »
If you only started a year ago, any capital gains on your contributions will be relatively small considering your account balance. I don't have betterment, but there's got to be a way to view what your performance is. If you made $400, then that is the amount that will be taxed. Not the entire amount you withdraw.

I think your idea of pulling out your Betterment funds to pay off the 8% debt is acceptable. Will you be able to pay off your no-interest cards before the promo is gone? Also, do you have an emergency fund? These are other important considerations.

Bigger question: what are you going to do to make sure this doesn't happen again? :)


Jack

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Re: Withdraw from Betterment to pay down new debt?
« Reply #2 on: April 26, 2016, 10:58:41 AM »
I assume your Betterment account is a regular taxable account, not an IRA? In that case, it's very likely that liquidating the investments to pay off the debt is the best plan.

To figure out for sure, you'd still need to do the math: figure out how much of the account's value would trigger capital gains tax (i.e., your cost basis), determine what your capital gains tax rate is, figure out how long it would take you to pay off the $4000 if you didn't liquidate the investments, and then do a present-value analysis of both options to see which is better.

(As an example, here's a situation where it would make sense to keep the funds in Betterment: you're planning to pay off the cards in less than a year regardless, you have a very low cost basis -- i.e., ~25% gains, or ~50% if they're long-term, which isn't likely if your account has existed for only a year and a half! -- and your AGI is greater than $37,650. )
« Last Edit: April 26, 2016, 11:06:17 AM by Jack »

GrowingTheGreen

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Re: Withdraw from Betterment to pay down new debt?
« Reply #3 on: April 26, 2016, 11:26:17 AM »
I assume your Betterment account is a regular taxable account, not an IRA? In that case, it's very likely that liquidating the investments to pay off the debt is the best plan.

To figure out for sure, you'd still need to do the math: figure out how much of the account's value would trigger capital gains tax (i.e., your cost basis), determine what your capital gains tax rate is, figure out how long it would take you to pay off the $4000 if you didn't liquidate the investments, and then do a present-value analysis of both options to see which is better.

(As an example, here's a situation where it would make sense to keep the funds in Betterment: you're planning to pay off the cards in less than a year regardless, you have a very low cost basis -- i.e., ~25% gains, or ~50% if they're long-term, which isn't likely if your account has existed for only a year and a half! -- and your AGI is greater than $37,650. )

Present value analysis? Example? Now that's a response worthy of Magnum Stache status.

jenscaffidi

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Re: Withdraw from Betterment to pay down new debt?
« Reply #4 on: April 26, 2016, 12:41:34 PM »
If you only started a year ago, any capital gains on your contributions will be relatively small considering your account balance. I don't have betterment, but there's got to be a way to view what your performance is. If you made $400, then that is the amount that will be taxed. Not the entire amount you withdraw.

I think your idea of pulling out your Betterment funds to pay off the 8% debt is acceptable. Will you be able to pay off your no-interest cards before the promo is gone? Also, do you have an emergency fund? These are other important considerations.

Bigger question: what are you going to do to make sure this doesn't happen again? :)

Ha! I feel pretty confident that I've learned my lesson. I'm sure there will be fun tempting opportunities in the future, but the pain of this experience won't soon be forgotten, which is to say: I don't plan on using the fun times as an excuse to spend money I don't have! It's been REALLY easy to just put those cards away and not continue the spending problem over the past few months, so I'm using this time to strengthen my willpower muscle. Should the siren song call me again, I'll take the credit score hit and close the accounts.

Oh! And my total Betterment earnings are currently -$24.56, so that's the loss I'd be eating, I suppose.

And yeah, with the interest-earning balance out of the way, I could wipe out those no-interest balances before the promotional period ends, no problem.
« Last Edit: April 26, 2016, 12:44:08 PM by jenscaffidi »

Jack

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Re: Withdraw from Betterment to pay down new debt?
« Reply #5 on: April 26, 2016, 12:55:29 PM »
Oh! And my total Betterment earnings are currently -$24.56, so that's the loss I'd be eating, I suppose.

Oh, good!* That means the decision is a no-brainer: not only is it clearly better to withdraw the funds and pay off the cards, but you might get a little tax-loss harvesting out of it.

(* well, not "good" -- positive returns would have been better!)

jenscaffidi

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Re: Withdraw from Betterment to pay down new debt?
« Reply #6 on: April 26, 2016, 12:56:21 PM »
To figure out for sure, you'd still need to do the math: figure out how much of the account's value would trigger capital gains tax (i.e., your cost basis), determine what your capital gains tax rate is, figure out how long it would take you to pay off the $4000 if you didn't liquidate the investments, and then do a present-value analysis of both options to see which is better.

(As an example, here's a situation where it would make sense to keep the funds in Betterment: you're planning to pay off the cards in less than a year regardless, you have a very low cost basis -- i.e., ~25% gains, or ~50% if they're long-term, which isn't likely if your account has existed for only a year and a half! -- and your AGI is greater than $37,650. )
THANK YOU! This is exactly the kind of thing I was hoping would surface here. When I initiate the withdrawal transaction, I get a notification that reads: "This transaction is expected to realize $106 in losses. This may result in tax savings." That's about half what I would pay in interest between now and December, by some back-of-that-napkin math.

So, is it worth it?

ETA: I see your response up there. Looks like the right choice then! Ugh, it hurts. The pain, it will remind me...

Dicey

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Re: Withdraw from Betterment to pay down new debt?
« Reply #7 on: April 26, 2016, 01:18:48 PM »
Not so fast. If you will be moving soon, where will your deposit and moving expenses come from? My advice is to figure that out first or the temptation to run up your cards may resurface much sooner than you anticipate. Personally, if 4k is all your savings, I'd leave it be and hustle my ass off to pay off those debts via cash flow + side hustle. You will be a lot slower to relapse if you can still feel the pain of this one.

Also, if 4k is all you have in savings/investments, why the heck is it with Betterment?

jenscaffidi

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Re: Withdraw from Betterment to pay down new debt?
« Reply #8 on: April 26, 2016, 01:48:27 PM »
Not so fast. If you will be moving soon, where will your deposit and moving expenses come from?

Good question! I have a portion of the deposit and first month's rent sitting idly in a Capital One 360 savings account. My logic is something like "If I use the Betterment money to pay that debt, then that frees X number of dollars every month for the moving problem."

Also, if 4k is all you have in savings/investments, why the heck is it with Betterment?

I had to start small ($50 a month) and Betterment seemed like a good option? I recently opened a WiseBanyan account, too, but that was only maybe 3 months ago, so there's not a lot in there yet. What else would you recommend? Trying to figure out how to buy just straight-up VTI from Vanguard seemed really complicated two years ago when I started getting interested in investing, and the Betterment article (http://www.mrmoneymustache.com/betterment-vs-vanguard/) convinced me that was the way to go. I'm open to options, though.

Retire-Canada

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Re: Withdraw from Betterment to pay down new debt?
« Reply #9 on: April 26, 2016, 02:25:46 PM »
Good question! I have a portion of the deposit and first month's rent sitting idly in a Capital One 360 savings account. My logic is something like "If I use the Betterment money to pay that debt, then that frees X number of dollars every month for the moving problem."

That's okay as long as you are sure you won't be forced to move earlier than you can save the money to cover it. If you are unsure you should at least hold back the amount you'll need for that expense.