On Wednesday, May 31, 2023 at 9:27:00 PM UTC-7, wrote:
On Saturday, August 6, 2005 at 7:04:27 PM UTC-7, pooky wrote:
Hello,
I am looking to correct the bad situation of being in debt, which would include gettting rid of mortgage debt. It seems that even if I
eliminated the credit card debt that we have, that mortgage debt is
just as bad and if I'm going to take the hit of a 401k distribution, I
may as well knock down the mortgage as well.
The situation is (approx numbers):
- $140k bi-weekly mortgage with pmi @ 4.625% with a potential rise to 5.625% if I lose my employment. Last year, pmi cost me $1100. I do
pay $100/mo additional principal.
- $15k in cc debt (although only a 1/3 has an interest applied and the rest is on-schedule to be paid before the 0% intro runs out)
- no "direct" car payment (car was paid off with a lower interest cc
that is factored in the $15k cc line). We drive an 8yo and 7yo
vehicles, each purchased as used and require minimal maintenance.
- I pay approximately $297/mo in mortgage interest and pmi
- I pay approximately $1500 to the cc bills which incurs $62/mo in interest ($360/mo total in interest to mortgage, pmi and cc's)
- Last year, my taxable income was $34k, so the distribution would probably kick me into the next bracket, but I am unsure of how much
that effect would be.
- I am in my mid-30's
The problem is that we are cash poor and $360/mo is a lot to be paying
in interest, which is why we are looking to get out as quickly as possible. We are already bulk buying, buy on-sale online, visiting
garage sales and do not eat out, etc. but without the ability to pay
all of the bills with cash and live on cash, we recognize that we are fighting a losing battle.
I have recently changed jobs and have approx. $66k in my former 401k
plan. I am trying to figure out what my distribution would be
after-tax, if I took it as a check and/or whether or not the hit would
be worth it in the long run.
As I read about the effect of compound interest and average rate of
return on an investment, the "expected" calculation rate seems to be between 8-10%. However, with the major corporatation legal issues (who doens't have their executives on trial right now???), and other uncertainties in the market, I have a great deal of uneasiness with expecting that rate in the future.
It seems that my investment options by rolling the 401k would be to
hope for a 10% (let's use this for argument's sake) return over the
next 30 years, minus taxes at withdrawal of around 15%, which would
reduce my actual take to 8.5-9%. Or, I could invest in lower risk
options other than equities and take a lower rate of return. Alternatively, I could take the $66k, minus the 10% penalty tax
($6,600) and what my regular estimated tax rate would be ~30%
(estimated tax and would cost ~$19.8k), this would leave me approx. $39,600 (66-19.8-6.6 = $39,600).
What would I do with that money?
- pay off all cc and cut them up
- Pay off enough of the mortgage to eliminate pmi (roughly $17k needed, although this may be less as our property has appreciated since it was bought)
- any money leftover would go to: 2005 Roth, emergency fund
The $4300/yr not tied up in interest and pmi, plus the $1500/month not going to cc principle (~1800/mo total) would go toward rebuilding retirement, a better budget, house repairs, child savings and paying
off my mortgage early. I am also looking at low-startup cost
businesses in addition to my salary. This, I believe, would give a guaranteed, tax-free 4.625% return on pre-paid mortgage dollars,
eliminate the pmi and cc interest and significantly dent my overall mortgage interest without the risk of the investment options. I would
also reduce the effect of the higher interest rate in the event that something did happen to my job. I would continue to contribute to my current company's 401k for the matched max, as I don't want to abandon that benefit. I have thought about stopping the current 401k and
applying this money to the debt, but it is such a small amount that it doesn't seem logical when you factor in the tax deduction.
The debt-free campaigns talk about eliminating your highest-interest
debt and accelerating your payments as bills are paid off. By taking
the distribution, I would essentially do that immediately, with all of
my "free" cash going to pay off the house. While I know that I would
be forfeiting something down the line, it seems that consolidation
loans and other types of "tools" only seem to change the parameters,
but not the debt. The risk of going back into cc debt is mitigated by having tried to cut back over the past 18 months. Yes, it is a bad situation, but mathematically, it seems that cutting my losses now
seemed better than trying to pay things off over along period of time.
Is there anything I have not factored into the equation of taking the distribution other than an estimated 30% tax and 10% penalty on the
gross distribution (other penalties, etc.) ?
Are there other tools should I consider (moving is not an option, as
the lawyer fees, etc., would eat much more than the 10% tax penalty of
the distribution)?
Any other advice would be appreciated.
Thank you.
https://news.yahoo.com/finance/news/lost-400k-retirement-savings-roth-174006044.html
(2023 Youtube upload):
"RED FLAG: Americans Draining 401ks | Counter Points"
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