For one thing, if you take an IRA or 401(k) distribution prior to … You'd have to pay income tax on the distribution from the 457b, so you'd only have after tax funds to apply to the debt. Should I Use My Retirement Funds To Pay Off Debt? First the data: I'm a 30 year old male renting in NYC. Any payments above and beyond your required payment will help reduce the debt, and there are two popular strategies that others have used with success. Below, Renfro explains when it makes sense to lower your retirement contributions to pay down existing debt and what to do in order to make sure it's worth it in the long run. Join our community, read the PF Wiki, and get on top of your finances! You might have good intentions and say to yourself that once the debts are paid off, you will have extra money with which to build up your retirement savings. 12 - 60 months term. Get a FREE customized plan for your money. If you need to pay off your debt, options other than tapping into your 401(k) may be better in the long-run. … But if you redirect the money you’d be spending on a mortgage to your 457 (b) plan after the loan is paid off, you may be able to make up for those lost years of saving. At 20%, you would have paid $23,585 in interest. 2. Both debts have been sold to a collection agency. by Lynnette Khalfani-Cox, January 26, 2012 | Comments: 0. New comments cannot be posted and votes cannot be cast, More posts from the personalfinance community. Please contact the moderators of this subreddit if you have any questions or concerns. Question: I have two debts I owe, each for about $200.One is a phone bill and the other from a water service company. To pay off debt, you’ll need to pay more than the minimum. I'd like to take out some of that money so I can pay off the $25,000 I owe on my credit card and be debt-free (aside from my home mortgage; I split that $1,688 monthly payment with my husband, who is also retired). Popularized by Dave Ramsey, the idea is to pay off … Don't use your 401(k) to pay off credit card debt, says 'credit junkie' with an 800+ score who tried it once ' I'm still on the journey': How this entrepreneur is bouncing back from 5-figure debt First of all, if you withdraw the money outright, without using a loan, you will have to pay a penalty of 10% of the amount, if you aren’t 59-1/2. But if it looks like you'll be paying the minimums for a while, it could cost you more in the long term if you're paying high interest charges on your debt each month. Of course, there are downsides to using retirement account money to pay off your credit card debt. But how exactly should you do that? If you are regularly investing in a retirement account, whether that's a 401(k) or an IRA, one solution could be to lower your contribution amount and redirect that money toward paying off debt. Those options may disappear after you use the money to pay off debt. After you've established an emergency fund and paid off high-interest debt, you can begin to boost your savings. In the past, I used a 457b at a prior clinic. Or any questions to clarify anything. If you have a higher rate of say, 18-20%, it may make more mathematical sense to borrow against your 401k to pay off the debt. With these high rates, the table begins to shift and make more mathematical sense to pay off your debts from your 401k account. AskanExpert: Should I Pay Off a Debt in Collections and Will it Help My Credit? As for a loan for the other debt, generally I think it makes sense. Doing so could help you save on monthly interest payments. There are two issues with tapping your retirement fund to pay off debt. There are a few things … But now that banks are making it harder to get credit cards, fewer consumers have access to this choice. But there's one rule that applies no matter what your individual situation is: If you don't have any cash set aside, first start an emergency fund. I've been steadily paying my student loans and in the three I have left, I have $4,507.45 left. We made the decision to use a $25,000 IRA withdrawal to pay off the mortgage. People use personal loans for so many different reasons—from buying an RV to paying off medical bills—but consolidating your credit card debt may be one of the most popular uses. By putting your 401k withdrawal toward debt, you may be able to pay off your account in full. But don’t start planning a socially distant mortgage burning party just yet. If you pay a $4 minimum on the $100 debt, then it’ll take you 32 months to pay off the debt (use this hand debt repayment calculator) and in the end you’ll have paid a total of $128 for a $100 purchase. I have a 457 and the rules may be different in your plan, but in mine, the most I can borrow against is 50% of the value up to 50k. Should I pay both? Leave the $5,000 growing and save $54,679.00! Once you make a payment, you usually can’t get the money back. Dear Debt Adviser, I have $15,000 in a 403(b) and a car loan at 4.9 percent that has $14,500 left to pay that matures in November 2013. Before the recession, many consumers turned to balance transfer credit cards like the Citi Simplicity® or the Wings Visa Platinum Card to pay off debt over a period of six to 20 months with zero interest. Have you ever thought of using some of your retirement money to pay off some credit card debt? Look over your accounts. Q. I'm a retired police officer, 59 years old, and have about $100,000 in a fixed annuity account. A proper emergency fund. Many financial experts, including Dave Ramsey, say that when it comes to deciding whether to save first or pay off debt, you should always save enough for an emergency fund first. CNBC Select may receive an affiliate commission when you click on the links for products from our partners. We have a total balance between the two accounts of around $115,000. If, for example, you lose your job soon after paying off significant debt, you cannot undo that decision and may need to apply for a personal loan to cover your monthly expenses. It only takes 3 minutes! Some folks will be able to do this, but most of us will find another use for the money. This is especially true if you are balancing multiple debts, you're anticipating less money coming in and you're not sure how to prioritize your bills. You can technically walk away from those and take the (massive) credit hit. … The One Time You Can Use Retirement Money to Pay Off Debt Most of the time it's not worth raiding your nest egg, but this loan can be the exception. Thanks. ( iStock ) The average 401(k) account has a … "Diverting some retirement savings to paying down credit card debt can make a lot of sense right now," Brandon Renfro, a certified financial planner in Marshall, Texas, tells CNBC Select. When the leadership decided to sell to a HMO and I decided to go back for a fellowship, the monies from the 457b were a nice bridge during the year of fellowship pay down … Save Money, Pay Off Debt or Invest: A Comparison. I am a bot, and this action was performed automatically. With interest rates on my debts ranging from 13.49% to 2.33%, I’m mostly just attacking the highest interest ones first unless there’s a small enough debt I could pay off in a few months. Without one, Renfro argues, "you run a very serious risk of simply not picking it back up.". Here are some steps you can take to pay off loans and enjoy the remainder of your retirement days debt-free. "Given how shaky things are economically, I think putting some focus on paying off credit cards is prudent," says Renfro. How to Pay Off Debt (the Smart Way) 1. No turning back. When Paying Off Debt With Your 401(k) Makes Sense. I just mention that because once you take out the 15k, you may not have access to as much of the rest as you thought. Petal® 2 "Cash Back, No Fees" Visa® Credit Card, Don't use your 401(k) to pay off credit card debt, says 'credit junkie' with an 800+ score who tried it once, I'm still on the journey': How this entrepreneur is bouncing back from 5-figure debt, Understanding this financial term can save you thousands of dollars over time, Biden extends student loan payment freeze for 8 months—here's what experts say borrowers should do, Millennials boosted their credit more than any generation in 2020—here were the average FICO scores, Minnesota residents have the highest average credit score—here's how other states compare. The total loan would be about $15k to pay off this dumbass debt I have then just pay the loan off over the course of however long. Q: My wife and I are both 47 years old and we both have Roth IRAs that we are maxing out each year. Debt snowball: the “debt snowball” is a way to build momentum as you reduce debt. Live on a budget. 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