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Thread: Tough spots and a 401K

  1. #1
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    Tough spots and a 401K

    I used to make about $20 per hour, and we live simply. Basically we were rich; if we saw something we wanted we could buy it. My job was eliminated and with no certificate or degree, today's market is tough. In a month I found a job that I love but only pays about 60% of my other job. Since we live simply, we are making it. My wife now has a full time position as a bank teller which really is a low paying job for as nice as they have to dress. We have a little credit card debt now, about $1200, and just had to borrow $700 to replace the water pump on my car. To me it is awful tempting to remove some cash from my 401K and pay off the cards and the water pump. My wife says if we just buy what we need we will be okay. What do you think? I do not have a lot of money in the 401K but am now adding to it and it is in good hands, making some money. We are able to buy a premade pizza on Friday nights from Meijer, really pretty good, and we are subscribed to Netflix so we are not really in bad shape but a night at the movies or out on the town is out of the question. We have it pretty good but the tightness of our finances is a burden. The credit card debt is mostly from repairs on our Saturn Vue and my daughters High School correspondence course, we have one more year of her schooling and we got rid of the Vue. So do you remove money from the 401K or do you just keep plugging away?

    I also have a nice Powermatic shaper I could probably get about $800 for but would then never be able to replace, what are your thoughts on selling good tools?
    Last edited by Moses Yoder; 09-06-2014 at 5:55 AM.
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  2. #2
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    Moses,

    You are going to get a ton of advice from folks here on the board. My strongest recommendation is to meet with a certified financial advisor and have them run the numbers for you.

    My personal recommendations would be: 1) get your credit card debt to a card with the lowest interest level and concentrate on paying it off, 2) don't touch the 401k, there will probably be a penalty for withdrawal, and it sounds like you will not easily be able to put the money back in soon (thereby losing the benefit of compound interest in the long term), 3) you didn't say what you are currently doing with the shaper, but unless it is going to help you bring money into the family coffers, consider selling it to reduce you credit card debt, and 4) depending on personal circumstances and the quality of the local school system, seriously consider enrolling your daughter in the local high school to eliminate the cost of the correspondence courses.

  3. #3
    Quote Originally Posted by Bruce Pratt View Post
    My personal recommendations would be: 1) get your credit card debt to a card with the lowest interest level and concentrate on paying it off, 2) don't touch the 401k, there will probably be a penalty for withdrawal, and it sounds like you will not easily be able to put the money back in soon (thereby losing the benefit of compound interest in the long term), 3) you didn't say what you are currently doing with the shaper, but unless it is going to help you bring money into the family coffers, consider selling it to reduce you credit card debt, and 4) depending on personal circumstances and the quality of the local school system, seriously consider enrolling your daughter in the local high school to eliminate the cost of the correspondence courses.
    Moses,
    Personally, I would do the same things that Bruce recommends.
    I hope that things get easier in time.
    Fred

  4. #4
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    I would leave the money in the 401K. Penalties and taxes will eat about 50% of what you take out. If you need $2000 you'll have to take out about $4000 to get it.

    The penalty and taxes are probably going to be more than the interest you'll pay on the $1900 you have borrowed at this time.

    Then don't forget to figure the lost interest on the $4000 that's missing from the 401K

    Maybe you could pick up a 2nd part time job for awhile or grab all the overtime you can if any is offered.
    Confidence: The feeling you experience before you fully understand the situation

  5. #5
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    I would not touch the 401k, like said above penalty and taxes will require you to take out at least 50% more than you need to pay off the CC and loan. Get your credit card debt to the lowest interest rate card you can find. I would look for a part time second job and keep your eyes and ears open for a higher paying job. I would consider enrolling your daughter in the public school system if it is of reasonable quality. I would really look at income and expenses and if you can pay of the CC and loan without selling tools I would do so, If you cannot pay off the debt and have some funds available for the unexpected because the unexpected will happen then I would sell some tools. You do not want to drop into a debt spiral.
    George

    Making sawdust regularly, occasionally a project is completed.

  6. #6
    Yea don't touch the 401 you will regret it later.
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  7. #7
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    This sounds stressful for you. My 0.02 - stop contributing to the 401k for now, and use that liquid cash to build a savings for things like the next water pump. It might not be a popular view and sounds counterintuitive, and you may hate debt, but you could pay the minimum on the card until you have a cash cushion to absorb the average unplanned expenses, and then go after paying it off. Otherwise, as pointed out, it can lead to a spiral of reliance on the card to make ends meet because the well never has any water in it.

  8. #8
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    Wouldn't financial planner cost him more of what he doesn't have IE money and they basically just give you a budget that you could do yourself. The best thing is write every penny you spend down and see where the money is actually going When I say everything I mean everything like money for a pack of gum or candy. You will be surprised at how much the little stuff adds up.

  9. #9
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    Quote Originally Posted by Jerome Stanek View Post
    Wouldn't financial planner cost him more of what he doesn't have IE money and they basically just give you a budget that you could do yourself. The best thing is write every penny you spend down and see where the money is actually going When I say everything I mean everything like money for a pack of gum or candy. You will be surprised at how much the little stuff adds up.
    Jerry has an excellent suggestion. I did this when I was on the army and it will show you exactly where the funds go.
    George

    Making sawdust regularly, occasionally a project is completed.

  10. #10
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    I've been there in your shoes kinda. When I was younger, we had our first house and I'd done the renovations and we wanted to move up to something bigger. I decided I was going to do a modular and be the GC. Well with the money we made from the sale, and a construction loan, I had it all planned. Then disaster hit. The amount I'd budgeted for the septic, and road into the property came up half of what it cost. My only solution was to put it on the credit card. At the end I wound up 25k in dept on my CC and making a monthly payment of 750 bucks, I was making about a 70 actual mark against the loan. I knew it would never get paid off. I'd had several jobs by then with the state, so while not overwhelming, I made the hard choice to liquidate two 401k's to get totally out of dept, and swore I'd never put myself in that position again. That was 1994. I've stuck to it, and luckily reconstitued my efforts to saving and now have a good nest egg.

    Now the bad side of taking it out . Imediate hit on taxes. If you are less that 55 (59 & 1/2 if its an ira) you will take an imediate 10 percent hit, + it is taxable income. So the gov't will get a huge benefit from your labor. A loanshark would not get 38%.

    Next lost opportunity cost. That money if you are young, will forfeit all the years of earnings and that could be significant. I've calculated what I lost by cashing out and it's in the neighborhood of 100k. It's not peanuts.

    So unless you are not in dire need or are up to your eyeballs (as I was), I'd say don't do it and only touch it to save you from going under. In most cases even declaring bankruptcy(depending on your state) 401k's are off limits from creditors. Protect it at all cost.

    In my case, I made a comitment to never put myself in that position again, and I can say I've done it. I put away 15% and it hurts and I've got a kid in college now and paying off the other one that went a few years ago so it hurts. I know though at the end, it will be worth it.

    Take care and good luck.
    Last edited by Keith Outten; 09-06-2014 at 5:03 PM.

  11. #11
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    I would not sell the big tools unless there was NO other option. Aside from personal use for your projects, you might need them for side jobs which could generate cash. When we used to have a lot of credit card debt, we rolled it from one card to another with 0% APR offers. I would not pull from the 401k if a penalty was involved. You might have an option to borrow from your 401k which is an interest free loan to yourself. All you would lose is the interest you would have earned. But the interest on two grand would not break the bank. The loss of interest might be less than any credit card interest you are paying.

    Good luck Moses. Hope you find a solution that meets your personal situation.
    Last edited by Raymond Fries; 09-06-2014 at 9:06 PM. Reason: Added comment.
    Sometimes decisions from the heart are better than decisions from the brain.

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  12. #12
    One thing you guys are not considering, and I'm not advocating taking from the 401k, is that taxes at some point in the future will be regular income. So if there's a 38% tax hit coming from the 401k, it's not 38% vs nothing, it's 38% vs. whatever the tax rate would be after 59 1/2. Likely, the 59 1/2+ tax rate will be lower due to no other income, and of course no 10% penalty.

    Whether it comes out of the 401k or doesn't shouldn't make much difference in the long term. I'd try to get it elsewhere, but wouldn't sell a shaper I'd like, either. Even if you get it over time or take out a CC offer as a one-time deal to get a roll over 0% interest period (and make sure the card has a good rate), whatever you have to do.

    I agree with the comment above that a fee for service advisor is probably going to cost more than it's worth, it sounds like you are already doing a good job of cutting back, which is more than most people do.

    I'd personally be wary of commissioned advisors, too, but usually commission advisors are driven by the ability to make load/sales fees on an inflow of money and you don't have that going on right now.

  13. #13
    call your 401K provider to even see if you can withdrawal. mine won't let me withdrawal, only take loans out against. Only way I can withdrawal is to show that something critical needs to be repaired on my primary residence such as heating. That would let you stop thinking about it.
    ~Everyone has the strength, few possess the will~

  14. #14
    Moses, you might find this helpful. http://www.irs.gov/Retirement-Plans/...-Distributions

    Hopefully things will get better. They usually do.

  15. #15
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    Quote Originally Posted by David Weaver View Post
    One thing you guys are not considering, and I'm not advocating taking from the 401k, is that taxes at some point in the future will be regular income.
    Is it a 401 K or a Roth 401 K?

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