Advice on using investments to pay down debt
May 17, 2012 1:23 PM Subscribe
I have an investment account that I can access with only the tax penalty, but no other penalties, as well as various debts. I would like to use my investment account to pay off those debts. I am looking for advice on my particular situation. Ratios and special snowflake details inside.
I have an investment account that I can access that has an amount of money in it. I have debts in four different locations. My debts are : a loan to cover the adoption of our daughter. It has approximately a 4.25% interest rate and is the second biggest debt. I have one student loan for me, that is the largest debt, with approximately a 4.25% interest rate. My wife has a student loan with approximately a 5.875% interest rate. Lastly we have a small amount of credit card debt.
From what I gather from my research investment accounts like mine generally earn 5-6% a year. Mine has not done quite that well, but it's done near that.
I have a second investment account that I currently pay into monthly that I cannot access without penalties due to its design. I would like to use the account that I CAN access to pay off my various debts. With the money in my investment account, I should be able to get my debt down to a level that I could probably finish paying it off in a year or less with just my monthly income. Otherwise, it would probably take 5 or more years to pay off the debts. The debts at their current level are a big strain on our monthly budget. We have some difficulty in terms of exposure to risk, because we moved for my job and our house in our previous city still hasn't sold. Things are looking better this Summer (it's been two years since we moved), but we are very tired of getting so close to broke every month as well as our risk should we have any emergency expenses.
Some final extraneous details in case it would help with the advice : we do keep a monthly budget and, outside of emergencies, we don't spend more than we take in. We are pretty frugal (we drive old used cars with no car payment; we don't have cable; we eat out once a week at most; we have basic, non-data cell phones, etc.), so there isn't much to cut out of our monthly expenses to speed up our debt pay down. We are in our mid-30s, so we have a ways to go with regards to career, retirement, etc. I am very fortunate to have a job I enjoy, so I am not on an accelerated track to retirement. When we have the debt paid off, particularly the student loan, we plan on taking that budget line and putting that same money into a savings account, first for emergencies, and eventually for a 529 for our daughter's college.
I know that the Suze Orman-type advice is to only pay off the debt with an investment if the debt's interest is higher than the investment's interest earnings. I think that the volatility of the stock market has not really returned much more than 5-6% for the past ten years, anyway, and I know my own account hasn't quite matched that since its inception in 2007. Second, the stress of carrying various debts in various places and always feeling like I'm robbing Peter to pay Paul is wearing me out. We have been good about using our monthly budget and sticking to our plan for the past year or so, but big, unexpected expenses like an adoption, or home repair at a house we don't even live in keep me up at night.
So, my question is : do you, the reader, recommend that I proceed with my plan to empty one of my two accounts to pay off debts?
I have an investment account that I can access that has an amount of money in it. I have debts in four different locations. My debts are : a loan to cover the adoption of our daughter. It has approximately a 4.25% interest rate and is the second biggest debt. I have one student loan for me, that is the largest debt, with approximately a 4.25% interest rate. My wife has a student loan with approximately a 5.875% interest rate. Lastly we have a small amount of credit card debt.
From what I gather from my research investment accounts like mine generally earn 5-6% a year. Mine has not done quite that well, but it's done near that.
I have a second investment account that I currently pay into monthly that I cannot access without penalties due to its design. I would like to use the account that I CAN access to pay off my various debts. With the money in my investment account, I should be able to get my debt down to a level that I could probably finish paying it off in a year or less with just my monthly income. Otherwise, it would probably take 5 or more years to pay off the debts. The debts at their current level are a big strain on our monthly budget. We have some difficulty in terms of exposure to risk, because we moved for my job and our house in our previous city still hasn't sold. Things are looking better this Summer (it's been two years since we moved), but we are very tired of getting so close to broke every month as well as our risk should we have any emergency expenses.
Some final extraneous details in case it would help with the advice : we do keep a monthly budget and, outside of emergencies, we don't spend more than we take in. We are pretty frugal (we drive old used cars with no car payment; we don't have cable; we eat out once a week at most; we have basic, non-data cell phones, etc.), so there isn't much to cut out of our monthly expenses to speed up our debt pay down. We are in our mid-30s, so we have a ways to go with regards to career, retirement, etc. I am very fortunate to have a job I enjoy, so I am not on an accelerated track to retirement. When we have the debt paid off, particularly the student loan, we plan on taking that budget line and putting that same money into a savings account, first for emergencies, and eventually for a 529 for our daughter's college.
I know that the Suze Orman-type advice is to only pay off the debt with an investment if the debt's interest is higher than the investment's interest earnings. I think that the volatility of the stock market has not really returned much more than 5-6% for the past ten years, anyway, and I know my own account hasn't quite matched that since its inception in 2007. Second, the stress of carrying various debts in various places and always feeling like I'm robbing Peter to pay Paul is wearing me out. We have been good about using our monthly budget and sticking to our plan for the past year or so, but big, unexpected expenses like an adoption, or home repair at a house we don't even live in keep me up at night.
So, my question is : do you, the reader, recommend that I proceed with my plan to empty one of my two accounts to pay off debts?
I am not clear on the types of accounts you have. Is one a tax deferred account, like an IRA? And one is a regular taxable account?
When the markets were good I was all in favor of hanging on to debt that had low interest rates.
These days I'm more in favor of just paying the debt off and starting fresh. On the one hand, you have guaranteed money lost (debt maintenance costs) vs possible returns, that mostly haven't happened.
This is not the case for retirement accounts, which usually work out (in the US) to losing nearly half of the money to taxes and early withdrawal penalties. It's almost always a bad idea to cash out of retirement accounts to pay off debt.
posted by small_ruminant at 1:40 PM on May 17, 2012
When the markets were good I was all in favor of hanging on to debt that had low interest rates.
These days I'm more in favor of just paying the debt off and starting fresh. On the one hand, you have guaranteed money lost (debt maintenance costs) vs possible returns, that mostly haven't happened.
This is not the case for retirement accounts, which usually work out (in the US) to losing nearly half of the money to taxes and early withdrawal penalties. It's almost always a bad idea to cash out of retirement accounts to pay off debt.
posted by small_ruminant at 1:40 PM on May 17, 2012
Also, don't forget to leave a chunk of that money available in a savings account or something for emergencies. Don't put 100% into your debt. Leave yourself a cushion or you'll have to use your credit cards the next time your car needs repair or whatever.
posted by small_ruminant at 1:41 PM on May 17, 2012
posted by small_ruminant at 1:41 PM on May 17, 2012
I think we would need to know what kind of an account this is. If it is a retirement account that you have deferred tax on, the tax penalty for early withdrawal can be extremely hefty.
See above!
This is not the case for retirement accounts, which usually work out (in the US) to losing nearly half of the money to taxes and early withdrawal penalties. It's almost always a bad idea to cash out of retirement accounts to pay off debt.
posted by Jurbano at 1:42 PM on May 17, 2012
See above!
This is not the case for retirement accounts, which usually work out (in the US) to losing nearly half of the money to taxes and early withdrawal penalties. It's almost always a bad idea to cash out of retirement accounts to pay off debt.
posted by Jurbano at 1:42 PM on May 17, 2012
Response by poster: I have two different TIAA-CREF accounts. The first one was, to my knowledge, fully vested when I left the first university I taught at. The second one was started at the university I currently teach at. I started thinking about this option because I know someone who also left my previous university who used their initial TIAA-CREF account in the same way, to pay off debts, who did not have to pay early withdrawal penalties, because if you leave the employer with whom you had the account the money does not have the penalties any more. When I go through the steps to withdraw the money on the Web site, I believe it will tell me what my tax penalty is... Does that answer the questions?
posted by Slothrop at 1:50 PM on May 17, 2012
posted by Slothrop at 1:50 PM on May 17, 2012
You should call someone with the financial institution you have the accounts with and ask them. Fully vested means you are entitled to all of the money you were allocated but does NOT necessarily mean there are no early withdrawal penalties.
posted by Busmick at 1:53 PM on May 17, 2012
posted by Busmick at 1:53 PM on May 17, 2012
Response by poster: From what I found on the TIAA-CREF Web site, if I make the withdrawal, I will have 20% withheld as federal tax, 4% withheld as NC tax and 10% withheld as early withdrawal penalty basically (there are lots of exceptions to having the 10% withheld, but I don't seem to meet any of them).
Won't I have to pay the 20% and 4% if I hold onto it until I retire? Isn't the 10% the only penalty I am paying because I am taking it out early? Or am I missing something?
posted by Slothrop at 2:18 PM on May 17, 2012
Won't I have to pay the 20% and 4% if I hold onto it until I retire? Isn't the 10% the only penalty I am paying because I am taking it out early? Or am I missing something?
posted by Slothrop at 2:18 PM on May 17, 2012
When you retire, the money you withdraw will be your only, or most of, your small retirement income. Right now, it's part of your larger working income. So it will be taxed at whatever rate you're being taxed at now, plus another step if it bumps you into a higher bracket. That 20% and 4% they took out? Next April 15th, you might have to pay even more, depending on your bracket.
The money will also not have the chance to earn interest/gains/whatever from now til when you retire. There's a reason for the penalty: unless it's a dire emergency situation, it's really a terrible idea to withdraw early.
That 10% penalty? If it takes you 2.5 years to pay off the debts, you're effectively boosting the yield on your investments by 4%/year by *not* cashing out.
posted by notsnot at 2:30 PM on May 17, 2012
The money will also not have the chance to earn interest/gains/whatever from now til when you retire. There's a reason for the penalty: unless it's a dire emergency situation, it's really a terrible idea to withdraw early.
That 10% penalty? If it takes you 2.5 years to pay off the debts, you're effectively boosting the yield on your investments by 4%/year by *not* cashing out.
posted by notsnot at 2:30 PM on May 17, 2012
Yes, as I mentioned in my first answer you are always going to have to pay the taxes, wheteher its now or in the future. The 10% penalty is money you are "throwing away" by withdrawing early. From a strictly economical point of view you should not do this as you will probably be losing money in the long term.
Having said that, what many financial planners etc dont factor in is that taking a 10% penalty now and getting rid of your debts may make your quality of life better and thats what you have to decide. No one who gets paid to offer financial advice would ever tell you to do it because they were taught to maximize returns.
You have to weigh whether the amount of the 10% penalty is worth more to you as cash or quality of life.
posted by Busmick at 2:32 PM on May 17, 2012
Having said that, what many financial planners etc dont factor in is that taking a 10% penalty now and getting rid of your debts may make your quality of life better and thats what you have to decide. No one who gets paid to offer financial advice would ever tell you to do it because they were taught to maximize returns.
You have to weigh whether the amount of the 10% penalty is worth more to you as cash or quality of life.
posted by Busmick at 2:32 PM on May 17, 2012
Next April 15th, you might have to pay even more, depending on your bracket.
Also a good point...you will need your accountant to do a tax projection or you might be sitting on a big tax bill.
posted by Busmick at 2:34 PM on May 17, 2012
Also a good point...you will need your accountant to do a tax projection or you might be sitting on a big tax bill.
posted by Busmick at 2:34 PM on May 17, 2012
Response by poster: notsnot, I see your point, certainly. Without giving too much away about my financial details, if I received the payout the amount is not large enough to bump me up a tax bracket (which would only be taxed on the amount of my overage anyway). I am also in the tax bracket where I'd have to live REALLY frugally as a retiree to go into the next lower tax bracket. I am squarely in the middle class, as it were. Lastly, I have a second TIAA CREF account that I now pay into regularly (in fact, I think I pay more in than I did the first account).
Busmick, yes I think it's that quality of life issue that is swaying me. Because we are artist/academics who have had to move a lot, we have lived with periods of debt for a long time. It really, really wears me out. I am sick to my stomach just having to make this thread. I am suspicious of having to talk to my TIAA-CREF representative for the reason you state - they will have every reason to talk me out of it from THEIR point of view.
posted by Slothrop at 2:45 PM on May 17, 2012
Busmick, yes I think it's that quality of life issue that is swaying me. Because we are artist/academics who have had to move a lot, we have lived with periods of debt for a long time. It really, really wears me out. I am sick to my stomach just having to make this thread. I am suspicious of having to talk to my TIAA-CREF representative for the reason you state - they will have every reason to talk me out of it from THEIR point of view.
posted by Slothrop at 2:45 PM on May 17, 2012
if I make the withdrawal, I will have 20% withheld as federal tax, 4% withheld as NC tax
They may withhold that, but it has nothing to do with what you actually owe. You may owe more. You may get a refund. That's the standard withholding regardless of what your tax situation is.
If I received the payout the amount is not large enough to bump me up a tax bracket
You will be paying taxes on the money you pull out in the highest tax bracket you're in now. Even if you DID get bumped up to the next bracket, it's only the little bit that put you in there that get taxed that way. For instance, if that extra $37 dollars bumps you into the next bracket, ONLY the $37 gets taxed at that new, highest rate. I think you understand that, but I want to be clear about it.
There are other things it can screw up, like losing tax credits that only apply to people in certain income classes and things like that, but the basic tax brackets are not all-or-nothing.
The point is, that pulling it out when you're 30, and paying taxes on it, PLUS penalties is not usually the best use of your money. There are exceptions. And Busmick is right- quality of life is something to consider- but if you're doing it to get out from under the stress, just be very clear that you're doing this for emotional reasons, and not financial ones. Emotional ones are also important, but don't pretend one is the other.
It might be worth your while to pay a fee-only financial planner for an hour to look over your situation and make a recommendation. Find someone with a CFP designation.
posted by small_ruminant at 3:00 PM on May 17, 2012 [1 favorite]
They may withhold that, but it has nothing to do with what you actually owe. You may owe more. You may get a refund. That's the standard withholding regardless of what your tax situation is.
If I received the payout the amount is not large enough to bump me up a tax bracket
You will be paying taxes on the money you pull out in the highest tax bracket you're in now. Even if you DID get bumped up to the next bracket, it's only the little bit that put you in there that get taxed that way. For instance, if that extra $37 dollars bumps you into the next bracket, ONLY the $37 gets taxed at that new, highest rate. I think you understand that, but I want to be clear about it.
There are other things it can screw up, like losing tax credits that only apply to people in certain income classes and things like that, but the basic tax brackets are not all-or-nothing.
The point is, that pulling it out when you're 30, and paying taxes on it, PLUS penalties is not usually the best use of your money. There are exceptions. And Busmick is right- quality of life is something to consider- but if you're doing it to get out from under the stress, just be very clear that you're doing this for emotional reasons, and not financial ones. Emotional ones are also important, but don't pretend one is the other.
It might be worth your while to pay a fee-only financial planner for an hour to look over your situation and make a recommendation. Find someone with a CFP designation.
posted by small_ruminant at 3:00 PM on May 17, 2012 [1 favorite]
[Caution: long--didn't have time to edit it down, sorry!]
It appears that both accounts have early withdrawal penalties, then? I, personally, wouldn't touch an account with a 10% withdrawal penalty to pay down debt at 4%. If there weren't a penalty, then of course I'd use it (leaving an emergency fund to fund a job search if needed). If you don't have an emergency fund, then that's another good reason not to mess with the accounts in question. If you pay penalties and pay off some debt, that's great but now you don't have an emergency cushion. What I'm saying is that you want to be paying a penalty for the low-probability event of an emergency, not for the 100% probability of your debt.
I, also, am not you. My wife is similar to you in her debt tolerance (mine is higher), so I've totally seen how it eats at people. If you decide that you are willing to pay $X to not have as much debt, then do it. But please, do it with open eyes and be aware of the decision.
I've totally been there, going over the numbers constantly looking for ways to save. It's frustrating when you've already gotten the low-hanging fruit and you can't find other obvious ways to save. Here's some ideas we've had in similar straits:
- It looks like you own at least one home. Can you refinance it to favorable terms?
- Can you get by without a car, or "trade down" to a car that is cheaper (in price or operation cost)?
- Can one of you freelance or pick up a temporary second job? Tutoring? Making crafts or art? Repair skills of some sort? The nice thing about this sort of thing is that you can usually be flexible with how much time you spend on the other gig.
- Can you eat out even less? If you have a young child it's harder to eat out, anyway. You often spend as much time loading everyone up and getting to the restaurant and ordering as it would take to just cook. If this is at work, I sympathize but it's still possible to save. It's easier to not eat out at work when you have yummy leftovers.
- Can you spend less on groceries? We spend about $350/mo for six. Aggressive couponing, less meat, buy only on sale, etc. can do wonders for this area of the budget. Fixing big meals is cheaper per portion, and allows you to save/freeze leftovers for other meals. If it's yummy and convenient, then it's a lot easier to not eat out.
- Track your expenses religiously. We thought we were doing pretty well but you really have to measure it down to the dollar. "Robbing Peter to pay Paul" is not an issue if you're always spending inside your budgeted amount. This was a problem with my wife and I, in that she handles the expenses but I would forget to tell her about credit card purchases. Really, if you have good data here you're much less stressed. There's still emergencies, but even many of those can be planned after a fashion (and they're emergencies, right? They don't happen all the time.)
- Be really careful not to increase spending if you get extra money (either unexpected, or through tightening other areas). Looks like you'll do well on this.
- In general, there are a lot of situations where you can trade time for money, or money for time (prepared food, childcare, car wash, whatever). You of course want to be picking the "takes longer, is cheaper" option. In order to facilitate this, try not to make a lot of commitments as to your time. For example, I wouldn't want to sign on to extra unpaid work hours, or to volunteer somewhere. More demands on my time mean that A) I'll be more likely to spend money to save time somewhere, and B) I will be less able to spend time to save money (fixing a car, standing in line somewhere for a deal to flip on Craigslist, whatever)
- Can you temporarily reduce the amount you're saving towards retirement? If you get employer matching, I wouldn't reduce past the matching amount (free money, someday!)
- Many retirement accounts allow you to borrow against them. When I did this once for an unexpected expense, the interest on the loan was actually paid to my retirement account. I don't know if the rate is cheaper, but you may be able to spread out the term and help with the cash flow. This is way better than taking a withdrawal penalty if this option is available. Downside is that you of course aren't earning interest on that money (but some of it was offset by the debt anyway). And, of course, the money is eventually paid back.
- Do you have a wired phone that you never use?
Some other stuff that comes to mind:
- Your house has been on the market for two years? Can you rent it out, even short term (or raise the rent, if applicable)? Is there something you can do to make it more saleable? The obvious thing here is to reduce the price.
- You're doing a ton of good stuff. It seems you're not looking for validation as much as ideas, but good work, anyway. :) No cable, no smartphones, paid-for cars, not eating out much--these are all great. Good job, guys!
- Every time you skip eating out, or do your own oil change, or think it'd be nice to have cable, or whatever, just keep remembering that you'd even rather have less debt. It's not a permanent decision, and you can change your priorities later, but you get to consciously decide where you want to put your cash.
- Five years is not forever. If you have a budget that you can stick to, and a payment plan, it can be reassuring to know that you *will* be getting out of debt. Like any other big job, it might take a while, but you're getting closer Every. Single. Day. The curve is pointing in the right direction, and that's huge.
posted by RikiTikiTavi at 3:52 PM on May 17, 2012
It appears that both accounts have early withdrawal penalties, then? I, personally, wouldn't touch an account with a 10% withdrawal penalty to pay down debt at 4%. If there weren't a penalty, then of course I'd use it (leaving an emergency fund to fund a job search if needed). If you don't have an emergency fund, then that's another good reason not to mess with the accounts in question. If you pay penalties and pay off some debt, that's great but now you don't have an emergency cushion. What I'm saying is that you want to be paying a penalty for the low-probability event of an emergency, not for the 100% probability of your debt.
I, also, am not you. My wife is similar to you in her debt tolerance (mine is higher), so I've totally seen how it eats at people. If you decide that you are willing to pay $X to not have as much debt, then do it. But please, do it with open eyes and be aware of the decision.
I've totally been there, going over the numbers constantly looking for ways to save. It's frustrating when you've already gotten the low-hanging fruit and you can't find other obvious ways to save. Here's some ideas we've had in similar straits:
- It looks like you own at least one home. Can you refinance it to favorable terms?
- Can you get by without a car, or "trade down" to a car that is cheaper (in price or operation cost)?
- Can one of you freelance or pick up a temporary second job? Tutoring? Making crafts or art? Repair skills of some sort? The nice thing about this sort of thing is that you can usually be flexible with how much time you spend on the other gig.
- Can you eat out even less? If you have a young child it's harder to eat out, anyway. You often spend as much time loading everyone up and getting to the restaurant and ordering as it would take to just cook. If this is at work, I sympathize but it's still possible to save. It's easier to not eat out at work when you have yummy leftovers.
- Can you spend less on groceries? We spend about $350/mo for six. Aggressive couponing, less meat, buy only on sale, etc. can do wonders for this area of the budget. Fixing big meals is cheaper per portion, and allows you to save/freeze leftovers for other meals. If it's yummy and convenient, then it's a lot easier to not eat out.
- Track your expenses religiously. We thought we were doing pretty well but you really have to measure it down to the dollar. "Robbing Peter to pay Paul" is not an issue if you're always spending inside your budgeted amount. This was a problem with my wife and I, in that she handles the expenses but I would forget to tell her about credit card purchases. Really, if you have good data here you're much less stressed. There's still emergencies, but even many of those can be planned after a fashion (and they're emergencies, right? They don't happen all the time.)
- Be really careful not to increase spending if you get extra money (either unexpected, or through tightening other areas). Looks like you'll do well on this.
- In general, there are a lot of situations where you can trade time for money, or money for time (prepared food, childcare, car wash, whatever). You of course want to be picking the "takes longer, is cheaper" option. In order to facilitate this, try not to make a lot of commitments as to your time. For example, I wouldn't want to sign on to extra unpaid work hours, or to volunteer somewhere. More demands on my time mean that A) I'll be more likely to spend money to save time somewhere, and B) I will be less able to spend time to save money (fixing a car, standing in line somewhere for a deal to flip on Craigslist, whatever)
- Can you temporarily reduce the amount you're saving towards retirement? If you get employer matching, I wouldn't reduce past the matching amount (free money, someday!)
- Many retirement accounts allow you to borrow against them. When I did this once for an unexpected expense, the interest on the loan was actually paid to my retirement account. I don't know if the rate is cheaper, but you may be able to spread out the term and help with the cash flow. This is way better than taking a withdrawal penalty if this option is available. Downside is that you of course aren't earning interest on that money (but some of it was offset by the debt anyway). And, of course, the money is eventually paid back.
- Do you have a wired phone that you never use?
Some other stuff that comes to mind:
- Your house has been on the market for two years? Can you rent it out, even short term (or raise the rent, if applicable)? Is there something you can do to make it more saleable? The obvious thing here is to reduce the price.
- You're doing a ton of good stuff. It seems you're not looking for validation as much as ideas, but good work, anyway. :) No cable, no smartphones, paid-for cars, not eating out much--these are all great. Good job, guys!
- Every time you skip eating out, or do your own oil change, or think it'd be nice to have cable, or whatever, just keep remembering that you'd even rather have less debt. It's not a permanent decision, and you can change your priorities later, but you get to consciously decide where you want to put your cash.
- Five years is not forever. If you have a budget that you can stick to, and a payment plan, it can be reassuring to know that you *will* be getting out of debt. Like any other big job, it might take a while, but you're getting closer Every. Single. Day. The curve is pointing in the right direction, and that's huge.
posted by RikiTikiTavi at 3:52 PM on May 17, 2012
Early withdrawal from your retirement accounts is a bad idea. Forget the withholding number you get from the web site. Most likely you will pay 25% in federal income tax and 7% for North Carolina income tax. That's 32%, a third of your money gone off the top. In addition you will pay a 10% penalty. So say you withdraw $50,000. $5000 of that goes up in smoke for the penalty just as if you lit it on fire. Another $16,000 goes to income taxes. So out of your $50,000 you have only $29,000 you can apply toward debt. That doesn't sound like a very good plan.
You say that the reason you want to do this is because of the stress of the debt. Letting your emotions control your financial decisions is the worst thing you can do. Instead you need to either find a way to increase you income (change jobs or get a part time job) or else reduce your expenses so that you can pay down your debt. Do that with a reasonable, gradual plan and you will feel more in control and reduce your stress.
There is one other possibility that I hesitate to add because very few people can pull it off safely. Generally you can borrow up to 50% of the money in the 401k plan from your existing employer without penalty. (You can't do that with your ex-employer.) You have to pay back the money with interest, but you are paying the interest to yourself instead of the bank. However, and this is very important, if you lose your job or quit your job, you have to pay the full amount back to your retirement plan immediately or else pay a 10% penalty and taxes. And where would you come up with that on short notice after you've spent it all on your debts? You could end up in hock to the Feds with more interest and penalties. This is a risky situation and you shouldn't do it unless you are very confident in the security of your job and your discipline in saving.
posted by JackFlash at 4:36 PM on May 17, 2012 [1 favorite]
You say that the reason you want to do this is because of the stress of the debt. Letting your emotions control your financial decisions is the worst thing you can do. Instead you need to either find a way to increase you income (change jobs or get a part time job) or else reduce your expenses so that you can pay down your debt. Do that with a reasonable, gradual plan and you will feel more in control and reduce your stress.
There is one other possibility that I hesitate to add because very few people can pull it off safely. Generally you can borrow up to 50% of the money in the 401k plan from your existing employer without penalty. (You can't do that with your ex-employer.) You have to pay back the money with interest, but you are paying the interest to yourself instead of the bank. However, and this is very important, if you lose your job or quit your job, you have to pay the full amount back to your retirement plan immediately or else pay a 10% penalty and taxes. And where would you come up with that on short notice after you've spent it all on your debts? You could end up in hock to the Feds with more interest and penalties. This is a risky situation and you shouldn't do it unless you are very confident in the security of your job and your discipline in saving.
posted by JackFlash at 4:36 PM on May 17, 2012 [1 favorite]
I would reprioritize your savings.
You're losing sleep at night because you are afraid you can't afford to pay for emergencies. Yet you are not planning to start an emergency fund until you have your debt paid off. This doesn't make sense - you need an emergency fund or you could end up driven deeper into credit card debt at any time - you don't list what your credit card debt interest rate is but I bet it's way higher than 6%. I think you need to prioritize extremely highly:
1. Having an emergency fund to cover at least 1 month's household expenses, if not more
2. Paying off your small credit card debt that is probably very high interest.
I also think you should start the 529 account for your daughter right away. Even if you can only put $25 a month in it. The later you start with college savings the harder it is to save much. But don't compromise your retirement savings to do this - max out all options first.
I'm assuming by your reference to "vesting" that your TIAA-CREF accounts are employer sponsored retirement accounts, is that right?
My personal opinion, since you asked, is that you should not withdraw from your retirement accounts to pay off the educational debt, and that you should find other ways to scrimp and save for a brief time to pay off the small credit card debt. Create the emergency fund so that you are not stressing out so much. Then keep hammering away at the debt as much as you can with other money. Agreed with small ruminant. Check out Dave Ramsey, I get the sense you might like his snowball debt repayment strategies.
posted by treehorn+bunny at 4:44 PM on May 17, 2012
You're losing sleep at night because you are afraid you can't afford to pay for emergencies. Yet you are not planning to start an emergency fund until you have your debt paid off. This doesn't make sense - you need an emergency fund or you could end up driven deeper into credit card debt at any time - you don't list what your credit card debt interest rate is but I bet it's way higher than 6%. I think you need to prioritize extremely highly:
1. Having an emergency fund to cover at least 1 month's household expenses, if not more
2. Paying off your small credit card debt that is probably very high interest.
I also think you should start the 529 account for your daughter right away. Even if you can only put $25 a month in it. The later you start with college savings the harder it is to save much. But don't compromise your retirement savings to do this - max out all options first.
I'm assuming by your reference to "vesting" that your TIAA-CREF accounts are employer sponsored retirement accounts, is that right?
My personal opinion, since you asked, is that you should not withdraw from your retirement accounts to pay off the educational debt, and that you should find other ways to scrimp and save for a brief time to pay off the small credit card debt. Create the emergency fund so that you are not stressing out so much. Then keep hammering away at the debt as much as you can with other money. Agreed with small ruminant. Check out Dave Ramsey, I get the sense you might like his snowball debt repayment strategies.
posted by treehorn+bunny at 4:44 PM on May 17, 2012
I also think you should start the 529 account for your daughter right away.
I'm going to disagree with this. Start your emergency fund. Pay off your high interest credit cards. Start saving for your own retirement, and at the same time, start a 529, but fund yourself a lot more than the 529.
There are lots of ways to get granted, finagle, and borrow money for college, that are not as available to you for retiring. (The exceptions that I know about are your house, which you can often borrow against if you're not underwater, or one of those life insurance policies other people pay you to take out on you. I haven't played with those, but they exist.)
posted by small_ruminant at 4:54 PM on May 17, 2012
I'm going to disagree with this. Start your emergency fund. Pay off your high interest credit cards. Start saving for your own retirement, and at the same time, start a 529, but fund yourself a lot more than the 529.
There are lots of ways to get granted, finagle, and borrow money for college, that are not as available to you for retiring. (The exceptions that I know about are your house, which you can often borrow against if you're not underwater, or one of those life insurance policies other people pay you to take out on you. I haven't played with those, but they exist.)
posted by small_ruminant at 4:54 PM on May 17, 2012
Response by poster: I want to thank everyone for their thoughtful responses. These answers were very helpful in considering what to do next! We haven't made a final decision, but the comments here helped us to think of some different options. I really appreciate everyone's time and help!
posted by Slothrop at 4:27 AM on May 18, 2012
posted by Slothrop at 4:27 AM on May 18, 2012
I just think that the biggest hurdle to getting financial things done is the part that requires detailed action, like opening an account. I agree, the college savings themselves are not a priority over the retirement savings, but since he's all fired up about finances and savings right now, if he takes advantage of that and opens the requisite accounts, it'll be super easy in the future to adjust the amount he's funding to them.
posted by treehorn+bunny at 9:10 AM on May 18, 2012
posted by treehorn+bunny at 9:10 AM on May 18, 2012
This thread is closed to new comments.
I guess the real question is about the taxes. Is this an account that is growing tax free? How are you not paying a penalty by withdrawing? Are you sure there are no other penalties besides the taxes? You are going to have to pay the taxes at some point and if this will help you to get to a good place financially and more importantly, sleep at night, I would say do it.
Once you get this taken care of and are in a good place just be sure to resume saving and not grow your spending into your new cash flow.
posted by Busmick at 1:36 PM on May 17, 2012