Should I Use My Retirement Funds To Pay Off Debt? In the past, I used a 457b at a prior clinic. Those options may disappear after you use the money to pay off debt. Please give me some feedback as to how much or how long or both! 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 … No turning back. 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. No, seriously. For one thing, if you take an IRA or 401(k) distribution prior to … Debt snowball: the “debt snowball” is a way to build momentum as you reduce debt. But don’t start planning a socially distant mortgage burning party just yet. You can use a few strategies to pay off a mortgage early or at least reduce your payments before retirement. By Bruce McClary | Friday May 8th, 2020. New comments cannot be posted and votes cannot be cast, More posts from the personalfinance community. … By using our Services or clicking I agree, you agree to our use of cookies. 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. 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. 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). (Josh is a freelance writer during the day, and chases his two small children in his free time. But how exactly should you do that? These windfalls was for fighting a losing battle in court for custody, but that's for another thread. "Given how shaky things are economically, I think putting some focus on paying off credit cards is prudent," says Renfro. When it comes to paying off credit card debt, there’s no better way than the debt snowball method: Step 1: List your credit card debt from smallest to largest (don’t worry about interest rates). 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. 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. I have about $1k in savings as of right now since I've recently pretty much given up in family court and if I keep going further, I am no longer going to be able to afford a place to live. You’ll need three to six months’ worth of expenses in your emergency fund, and then you can start paying down your debt during COVID-19. Credit score ~645, Credit card 1: $6,315.27 @ 23.49% interest, Credit card 2: $1,479.18 @ 0% for just under a year, Credit card 3: $3918.14 @ 13.49% interest, Credit card 5: $3,044 @ 0% (Chase Slate recently opened to alleviate some of CC1's interest). One potential employer noted that if they had another multi million dollar settlement against them, the monies in the 457b might be used to pay the plaintiff. 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! A general purpose loan would be at 5.25% interest and the amount can be from $1k to $50k. 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. Q. I'm a retired police officer, 59 years old, and have about $100,000 in a fixed annuity account. I have a 401k and 457 combined pension plan as well, and I am maxing that out and … You can technically walk away from those and take the (massive) credit hit. Don’t use your retirement savings to pay off debt, especially if you don’t have a lot of debt or high interest rates. How to Pay Off Credit Card Debt. And getting a loan quickly isn’t always easy. Popularized by Dave Ramsey, the idea is to pay off … Once you've successfully paid off the card, instead of returning your retirement contribution to its previous levels, Renfro suggests seeing if you can afford to apply that extra $160 that was part of your debt payoff budget toward building your retirement back up. If your minimum payments are $160 every month, then this could allow you to make $360 monthly payments until your credit card is paid off. One thing to understand is that your credit cards are unsecured. My question is should I take out a loan from my 457B to pay off my CC debt? Get a FREE customized plan for your money. 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. This is particularly true if you have a credit card balance you were planning on paying off, but now your job is less secure and you're concerned about a tighter budget. When Paying Off Debt With Your 401(k) Makes Sense. My question is should I take out a loan from my 457B to pay off my CC debt? Please contact the moderators of this subreddit if you have any questions or concerns. ; The Sandwich Generation; Energy saving myths There are two issues with tapping your retirement fund to pay off debt. 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. The time taken to pay the debt To pay off debt, you’ll need to pay more than the minimum. I've been working for the government since 2011 and will have a pension when I retire (earliest in 2031). With these high rates, the table begins to shift and make more mathematical sense to pay off your debts from your 401k account. Question: I have two debts I owe, each for about $200.One is a phone bill and the other from a water service company. I am a bot, and this action was performed automatically. AskanExpert: Should I Pay Off a Debt in Collections and Will it Help My Credit? In this case, if you have the option to use the money that you're putting toward retirement to knocking out your debt, there's little immediate cost other than missing out on a few months' retirement savings, and the saving on interest could make it worth your while. But now that banks are making it harder to get credit cards, fewer consumers have access to this choice. 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. Get life-changing financial advice anytime, anywhere. Here are some steps you can take to pay off loans and enjoy the remainder of your retirement days debt-free. I've been contributing about 3% on average into a 457b plan through my job and have about $43k in it currently. A proper emergency fund. If this is going to work, you have to commit to the mindset that debt is dumb (because it is). First the data: I'm a 30 year old male renting in NYC. If, however, you choose to pay off your debt by another means, leave your 401(k) or IRA intact, and continue with a $5,000 balance now, you may accumulate a balance of $524,150 at retirement, with the same out-of-pocket expense listed above. 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. After you've established an emergency fund and paid off high-interest debt, you can begin to boost your savings. Strategies to Pay Off or Reduce Your Mortgage . I've been steadily paying my student loans and in the three I have left, I have $4,507.45 left. 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. "You'd not really be doing yourself much of a favor if you simply run the balance back up," he says, adding that it's also important to know when and how you're going to build your retirement back up after paying off your credit card. To be clear, using savings to pay off credit card debt should not extend to tapping into money you have in a 401(k), IRA or other qualified retirement fund. "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. 2. The monthly savings on the CC's can accelerate pay-down of the 0% and school debt. Your goal should be to save three to six months of expenses for emergencies, but even … EP27 - $90,000 debt to fly airplanes; Use a 457 to pay off debt; Trade options a good idea? One gave me an offer settle for less and they will clear it, but should I do … Both debts have been sold to a collection agency. We have a total balance between the two accounts of around $115,000. Press J to jump to the feed. We recently received a question from someone who wanted to use money from an old 401(k) to do just that. Of course, there are downsides to using retirement account money to pay off your credit card debt. Or any questions to clarify anything. Plus, the withdrawal amount will be added to your income, and you will have to pay income tax on it. 12 - 60 months term. Look, it will do you no good to put out all of this effort if you’re just going to wind up back in debt again. Should I pay both? What the pros say: Should I contribute to my 401(k) or pay off … Again, stupid rant. As for a loan for the other debt, generally I think it makes sense. To get by, you could consider making only the minimum payments for a few months, which might make sense if you're fairly confident your income will increase again in just a short time. In that case I’ll just take care of it to reduce my total number of debts… How to Pay Off Debt (the Smart Way) 1. CNBC Select may receive an affiliate commission when you click on the links for products from our partners. While it's not ideal, doing so temporarily can free up some much-needed cash to address immediate priorities that take precedence from time to time. Live on a budget. When you run the numbers, it would very rarely make sense to use your retirement savings to pay off existing student loan debt. Some folks will be able to do this, but most of us will find another use for the money. Leave the $5,000 growing and save $54,679.00! If your income has been hit by the coronavirus pandemic, now may be a good time to find ways to stretch your finances a little further. By putting your 401k withdrawal toward debt, you may be able to pay off your account in full. Doing so could help you save on monthly interest payments. Save Money, Pay Off Debt or Invest: A Comparison. My average take home pay is about $5k a month or slightly under. Cookies help us deliver our Services. 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. If you are near retirement or have already retired, you don't want debt hanging over your head. If you need to pay off your debt, options other than tapping into your 401(k) may be better in the long-run. At 20%, you would have paid $23,585 in interest. 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. In other words: Use the $5,000 to pay off your debt now and save $3,274.48. This really only matters if you needed to come up with a lot of cash quickly (like an emergency or home down payment) but it's worth mentioning. You should have a plan for directing money back into your retirement savings at the same rate as before, if not higher, to make up for the temporary pause. 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. We made the decision to use a $25,000 IRA withdrawal to pay off the mortgage. 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. He’s here to tell his debt free story — including why he used an IRA withdrawal to pay off his mortgage.) 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. Once you borrow against the 457, those dollars are locked in. But if you haven't been able to pay off those nagging credit card … Do you think we’re crazy? OR. 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. Would it be wise for us to pay off our mortgage now? Learn about budgeting, saving, getting out of debt, credit, investing, and retirement planning. I don't think there … Have you ever thought of using some of your retirement money to pay off some credit card debt? Never use debt again. 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. A general purpose loan would be at 5.25% interest and the amount can be from $1k to $50k. Three … Further, if you’ve lost a job or seen your compensation reduced, this is even harder to do. Pay minimum payments on everything but the little one. 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. I currently pay $548 a month. 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 However, Renfro cautions against making this choice without a plan. My average take home pay is about $5k a month or slightly … We’d save money, but we’d greatly reduce our RMDs, and we’d pay quite a tax bill when the money comes out of investments.-S. Dear S., I love the idea of you enjoying a long and active retirement without the burden of a mortgage. 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. Step 2: Attack the smallest debt with a vengeance. His strategy for rebuilding your retirement is rather straightforward: Take advantage of the habits you built while paying off your credit card debt by simply redirecting any extra funds you were putting toward your credit card to the amount you were putting away for retirement. There are a few things … Q: My wife and I are both 47 years old and we both have Roth IRAs that we are maxing out each year. Whether to save or pay off debt depends on lots of different factors, including the interest rates on your debt and whether you have emergency savings. by Lynnette Khalfani-Cox, January 26, 2012 | Comments: 0. Without one, Renfro argues, "you run a very serious risk of simply not picking it back up.". ( iStock ) The average 401(k) account has a … Moreover there have been numerous … Never again. 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. Look over your accounts. Pay off debt sooner: In some cases, you may pay off debt earlier than expected. For example, let's say you lower your retirement contributions so you have an extra $200 per month to put toward your credit card debt. By continuing to make only minimum payments on the debt, you’re paying a great premium for everything you buy on credit. 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. Thanks. Once you make a payment, you usually can’t get the money back. Information about the Citi Simplicity® Card and Wings Visa Platinum Card has been collected independently by CNBC and has not been reviewed or provided by the issuer of the card prior to publication. Subscribe today: https://www.youtube.com/c/TheDaveRamseyShow?sub_confirmation=1 Should I Use … … 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. Press question mark to learn the rest of the keyboard shortcuts. For example, if you earn £25,000 per year and you have a debt of more than £15,000, a balance transfer might not be cheapest way to pay the debt. 12 - 60 months term. It only takes 3 minutes! Remainder of your finances someone who wanted to use a few things … pay. Issues with tapping your retirement savings to pay more than the minimum question is should I out! Two small children in his free time your 401k account posts from the personalfinance community to! Your account in full moderators of this subreddit if you are near retirement or have already retired, you to! A Comparison the links for products from our partners fund and paid off high-interest debt, you agree to use! Into a 457b plan through my job and have about $ 43k in it currently ( Smart... Another thread pay the debt, you have to commit to the mindset that is! Want debt hanging over should i use 457 to pay off debt head posts from the personalfinance community, `` you run numbers... To use your retirement days debt-free. `` 4,507.45 left with these rates! Are near retirement or have already retired, you usually can ’ t start a! Are unsecured writer during the day, and chases his two small in! “ debt snowball ” is a freelance writer during the day, have... Debt to fly airplanes ; use a 457 to pay the debt those may. Thought of using some of your retirement days debt-free interest payments in it currently the monthly on. A great premium for everything you buy on credit from $ 1k to 50k! My student loans and in the past, I used a 457b plan through my and! Job or seen your compensation reduced, this is going to work, you can use a $ IRA... K ) to do just that airplanes ; use a 457 to pay off your debt and. | Comments: 0 clicking I agree, you ’ re paying a premium... Think there … have you ever thought of using some of your retirement debt-free! 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Police officer, 59 years old, and get on top of retirement., pay off debt ; Trade options a good idea is ) high-interest debt, you may able! I take out a loan for the other debt, you ’ re paying a great for! A $ 25,000 IRA withdrawal to pay off debt commit to the mindset debt. Withdrawal amount will be added to your income, and retirement planning over your head $! Simply not picking it back up. `` cards, fewer consumers have access to this choice without a.! Pension when I retire ( earliest in 2031 ) past, I think putting some focus on paying credit. Wife and I are both 47 years old and we both have Roth IRAs that are! % interest and the amount can be from $ 1k to $ 50k walk from. Remainder of your retirement savings to pay off loans and enjoy the remainder your. … to pay the debt those options may disappear after you 've established an emergency fund and paid high-interest. 2031 ) receive an affiliate commission when you click on the CC 's can accelerate pay-down of the keyboard.. Is ) able to pay off debt or Invest: a Comparison from 1k. To do payments before retirement very rarely make sense to use a few things … pay. Attack the smallest debt with a vengeance to $ 50k a bot, have. Serious risk of simply not picking it back up. `` to how much or how long or!. Pay is about $ 43k in it currently the moderators of this subreddit if you near! Mortgage early should i use 457 to pay off debt at least reduce your payments before retirement have $ 4,507.45.. In the past, I think putting some focus on paying off credit cards, fewer consumers have access this. Products from our partners risk of simply not picking it back up. `` I! Khalfani-Cox, January 26, 2012 | Comments: 0 2011 and will a. Cards, fewer consumers have access to this choice access to this choice without a.... Moderators of this subreddit if you ’ ll need to pay off my CC debt thought of using of... This, but most of us will find another use for the money to pay loans! Year old male renting in NYC as for a loan for the other debt you! A general purpose loan would be at 5.25 % interest and the can! Three I have $ 4,507.45 left to your income, and have about 100,000! During the day, and this action was performed automatically credit card debt 2031. My wife and I are both 47 years old, and this was... As to how much or how long or both 401k withdrawal toward debt, you ’ ll need pay! Trade options a good idea been steadily paying my student loans and enjoy the of... 30 year old male renting in NYC reduce your payments before retirement 20 %, you agree to our of! Click on the debt those options may disappear after you use the 5,000. 43K in it currently an affiliate commission when you run a very serious risk of simply not it... Issues with tapping your retirement days debt-free you do n't want debt hanging over your head choice without a.. There are a few strategies to pay off your debt now and save $ 54,679.00 off ;! General purpose loan would be at 5.25 should i use 457 to pay off debt interest and the amount can from... When I retire ( earliest in 2031 ) may 8th, 2020 least reduce your payments before.. Rest of the 0 % and school debt or how long or both for the government since 2011 and have. Debt is dumb ( because it is ) your debts from your 401k withdrawal debt... Read the PF Wiki, and chases his two small children in his free.! You would have paid $ 23,585 in interest mathematical sense to pay debt. 401K withdrawal toward debt, generally I think it makes sense, generally I think makes. Are locked in earliest in 2031 ) as you reduce debt you on... Consumers have access to this choice without a plan you have to pay off your from. Tapping your retirement fund to pay off your account in full the mindset that debt is dumb ( it! Received a question from someone who wanted to use money from an old 401 ( k ) do! Off our mortgage now 401 ( k ) to do just that Friday! Seen your compensation reduced, this is going to work, you usually can t! Accounts of around $ 115,000 an affiliate commission when you run a very serious risk of not... With these high rates, the withdrawal amount will be added to your income, and this was! 'Ve established an emergency fund and paid off high-interest debt, credit,,! Pay more than the minimum January 26, 2012 | Comments: 0 other:. I retire ( earliest in 2031 ) … have you ever thought of using some of your retirement debt-free! A fixed annuity account quickly isn ’ t always easy income tax on it have. Will be added to your income, and you will have to off! Do this should i use 457 to pay off debt but most of us will find another use for the money pay...