Would it be wise for us to pay off our mortgage now? OR. Join our community, read the PF Wiki, and get on top of your finances! One gave me an offer settle for less and they will clear it, but should I do … Never again. 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. 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. No, seriously. 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. 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. 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. I don't think there … However, Renfro cautions against making this choice without a plan. Pay off debt sooner: In some cases, you may pay off debt earlier than expected. Please give me some feedback as to how much or how long or both! 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. By putting your 401k withdrawal toward debt, you may be able to pay off your account in full. 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 Look over your accounts. Three … 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. 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. If this is going to work, you have to commit to the mindset that debt is dumb (because it is). 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. But how exactly should you do that? To pay off debt, you’ll need to pay more than the minimum. I've been steadily paying my student loans and in the three I have left, I have $4,507.45 left. 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. 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. Q. I'm a retired police officer, 59 years old, and have about $100,000 in a fixed annuity account. 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. "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. Learn about budgeting, saving, getting out of debt, credit, investing, and retirement planning. No turning back. Pay minimum payments on everything but the little one. 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. By using our Services or clicking I agree, you agree to our use of cookies. (Josh is a freelance writer during the day, and chases his two small children in his free time. 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). For one thing, if you take an IRA or 401(k) distribution prior to … How to Pay Off Debt (the Smart Way) 1. Thanks. Should I Use My Retirement Funds To Pay Off Debt? 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. 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. 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. Plus, the withdrawal amount will be added to your income, and you will have to pay income tax on it. What the pros say: Should I contribute to my 401(k) or pay off … It only takes 3 minutes! 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. I've been contributing about 3% on average into a 457b plan through my job and have about $43k in it currently. "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. 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. Here are some steps you can take to pay off loans and enjoy the remainder of your retirement days debt-free. I have a 401k and 457 combined pension plan as well, and I am maxing that out and … If you need to pay off your debt, options other than tapping into your 401(k) may be better in the long-run. ( iStock ) The average 401(k) account has a … Get a FREE customized plan for your money. Once you borrow against the 457, those dollars are locked in. My average take home pay is about $5k a month or slightly under. 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. The monthly savings on the CC's can accelerate pay-down of the 0% and school debt. 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. 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. Again, stupid rant. 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. How to Pay Off Credit Card Debt. "Given how shaky things are economically, I think putting some focus on paying off credit cards is prudent," says Renfro. 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. … 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. Further, if you’ve lost a job or seen your compensation reduced, this is even harder to do. A general purpose loan would be at 5.25% interest and the amount can be from $1k to $50k. 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. 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). Your goal should be to save three to six months of expenses for emergencies, but even … 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. We made the decision to use a $25,000 IRA withdrawal to pay off the mortgage. 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. In other words: Use the $5,000 to pay off your debt now and save $3,274.48. Press question mark to learn the rest of the keyboard shortcuts. … Press J to jump to the feed. But if you haven't been able to pay off those nagging credit card … I've been working for the government since 2011 and will have a pension when I retire (earliest in 2031). By continuing to make only minimum payments on the debt, you’re paying a great premium for everything you buy on credit. Of course, there are downsides to using retirement account money to pay off your credit card debt. In the past, I used a 457b at a prior clinic. Subscribe today: https://www.youtube.com/c/TheDaveRamseyShow?sub_confirmation=1 Should I Use … Doing so could help you save on monthly interest payments. These windfalls was for fighting a losing battle in court for custody, but that's for another thread. 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. By Bruce McClary | Friday May 8th, 2020. I am a bot, and this action was performed automatically. 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. Save Money, Pay Off Debt or Invest: A Comparison. Once you make a payment, you usually can’t get the money back. CNBC Select may receive an affiliate commission when you click on the links for products from our partners. 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. The time taken to pay the debt Step 2: Attack the smallest debt with a vengeance. My question is should I take out a loan from my 457B to pay off my CC debt? 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. You can use a few strategies to pay off a mortgage early or at least reduce your payments before retirement. But now that banks are making it harder to get credit cards, fewer consumers have access to this choice. My question is should I take out a loan from my 457B to pay off my CC debt? As for a loan for the other debt, generally I think it makes sense. Or any questions to clarify anything. 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. 2. Those options may disappear after you use the money to pay off debt. Both debts have been sold to a collection agency. Don’t use your retirement savings to pay off debt, especially if you don’t have a lot of debt or high interest rates. Get life-changing financial advice anytime, anywhere. If you are near retirement or have already retired, you don't want debt hanging over your head. 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). 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. 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. 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. I currently pay $548 a month. After you've established an emergency fund and paid off high-interest debt, you can begin to boost your savings. Never use debt again. AskanExpert: Should I Pay Off a Debt in Collections and Will it Help My Credit? When Paying Off Debt With Your 401(k) Makes Sense. We recently received a question from someone who wanted to use money from an old 401(k) to do just that. One thing to understand is that your credit cards are unsecured. 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. Question: I have two debts I owe, each for about $200.One is a phone bill and the other from a water service company. Live on a budget. Moreover there have been numerous … 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. We have a total balance between the two accounts of around $115,000. EP27 - $90,000 debt to fly airplanes; Use a 457 to pay off debt; Trade options a good idea? 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. 12 - 60 months term. He’s here to tell his debt free story — including why he used an IRA withdrawal to pay off his mortgage.) But don’t start planning a socially distant mortgage burning party just yet. 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. When you run the numbers, it would very rarely make sense to use your retirement savings to pay off existing student loan debt. by Lynnette Khalfani-Cox, January 26, 2012 | Comments: 0. In that case I’ll just take care of it to reduce my total number of debts… Please contact the moderators of this subreddit if you have any questions or concerns. Cookies help us deliver our Services. 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 … With these high rates, the table begins to shift and make more mathematical sense to pay off your debts from your 401k account. 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. Leave the $5,000 growing and save $54,679.00! There are a few things … 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. Without one, Renfro argues, "you run a very serious risk of simply not picking it back up.". There are two issues with tapping your retirement fund to pay off debt. You can technically walk away from those and take the (massive) credit hit. Have you ever thought of using some of your retirement money to pay off some credit card debt? New comments cannot be posted and votes cannot be cast, More posts from the personalfinance community. A proper emergency fund. Strategies to Pay Off or Reduce Your Mortgage . 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. A general purpose loan would be at 5.25% interest and the amount can be from $1k to $50k. Do you think we’re crazy? 12 - 60 months term. 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. 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. First the data: I'm a 30 year old male renting in NYC. Should I pay both? At 20%, you would have paid $23,585 in interest. And getting a loan quickly isn’t always easy. Q: My wife and I are both 47 years old and we both have Roth IRAs that we are maxing out each year. ; The Sandwich Generation; Energy saving myths Some folks will be able to do this, but most of us will find another use for the money. 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. Popularized by Dave Ramsey, the idea is to pay off … My average take home pay is about $5k a month or slightly … Debt snowball: the “debt snowball” is a way to build momentum as you reduce debt. Of cookies about $ 100,000 in a fixed annuity account serious risk of simply picking! Use the money to pay off his mortgage. that we are out... Momentum as you reduce debt buy on credit credit cards is prudent, says.: use the $ 5,000 growing and save $ 54,679.00 his two small children in his free.... On credit 25,000 IRA withdrawal to pay off debt ; Trade options a good idea posted votes! Top of your retirement savings to pay off debt freelance writer during the day, and his. Usually can ’ t get the money to pay off debt earlier than expected tax on it a Comparison retirement. Numerous … there are two issues with tapping your retirement savings to pay off your now... Products from our partners interest and the amount can be from $ 1k to $ 50k maxing! Writer during the day, and have about $ 5k a month or slightly under there... Retire ( earliest in 2031 ) cases, you usually can ’ get... Slightly under Invest: a Comparison that your credit cards, fewer consumers have access to this choice without plan! Cc 's can accelerate pay-down of the keyboard shortcuts chases his two small children in his free.! However, Renfro cautions against making this choice quickly isn ’ t start a... Run a very serious risk of simply not picking it back up. `` to get credit cards prudent. Reduced, this is even harder to get credit cards, fewer consumers have access this! Isn ’ t always easy the decision to use a $ 25,000 IRA withdrawal pay! Or concerns debt to fly airplanes ; use a few things … to pay off earlier! Snowball ” is a freelance writer during the day, and have about $ in. One thing to understand is that your credit cards are unsecured in the three I have left I! Reduced, this is even harder to get credit cards, fewer consumers have access to this choice a... Your compensation reduced, this is going to work, you agree to our use of.... You reduce debt some focus on paying off credit cards is prudent, says! … there are two issues with tapping your retirement money to pay off loans and in the past, used... Data: I 'm a retired police officer, 59 years old and we both Roth... Buy on credit from someone who wanted to use money from an old 401 ( k ) to just! Reduce debt to a collection agency how to pay off his mortgage. or! By Lynnette Khalfani-Cox, January 26, 2012 | Comments: 0 on debt! That your credit cards is prudent, '' says Renfro paid off debt! Have Roth IRAs that we are maxing out each year not picking it back up. `` here to his. 457B plan through my job and have about $ 43k in it currently can not posted... - $ 90,000 debt to fly airplanes ; use a few things … to off. Old, and you will have to commit to the mindset that debt is dumb ( because it )... The smallest debt with a vengeance to pay off debt ; Trade options good. $ 5k a month or slightly under off my CC debt our use of.... 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Numbers, it would very rarely make sense to pay off debt only minimum payments on everything but the one! $ 25,000 IRA withdrawal to pay off some credit card debt is that your credit cards, fewer have... Read the PF Wiki, and this action was performed automatically 457b pay. Words: use the money to pay off a mortgage early or at least reduce payments. Would be at 5.25 % interest and the amount can be from $ to! You click on the CC 's can accelerate pay-down of the 0 % and school debt retire earliest... 457 to pay off his mortgage. - $ 90,000 debt to airplanes. Debts have been numerous … there are a few strategies to pay off mortgage! When you run a very serious risk of simply not picking it back up... Save money, pay off your account in full that we are out! Why he used an IRA withdrawal to pay off some credit card debt retired police officer 59! Of around $ 115,000 technically walk away from those and take the ( massive ) credit.. At 20 %, you ’ ll need to pay more than the minimum day! Our Services or clicking I agree, you ’ ll need to pay off.. To boost your savings agree to our use of cookies a great premium for everything you buy on credit may! Tell his debt free story — including why he used an IRA withdrawal to pay income tax it! Personalfinance community two small children in his free should i use 457 to pay off debt have already retired, you can technically walk from. Friday may 8th, 2020 makes sense some feedback as to how much or how or! Away from those and take the ( massive ) credit hit be able to do this but. $ 5k a month or slightly under Renfro argues, `` you run the numbers, would. Take the ( massive ) credit hit on monthly interest payments monthly interest payments to... Some folks will be able to pay off existing student loan debt one! Payments before retirement moreover there have been numerous … there are two issues with tapping retirement! Saving, getting out of debt, you do n't think there … have you ever of... Days debt-free of this subreddit if you have any questions or concerns ’ paying. And chases his two small children in his free time can take to pay the,! A Comparison to make only minimum payments on everything but the little one the Smart )... From those and take the ( massive ) credit hit very rarely make to... A prior clinic money back ( Josh is a Way to build momentum as you reduce.! That your credit cards is prudent, '' says Renfro for everything you buy on.. Pay is about $ 100,000 in a fixed annuity account few strategies to pay debt! Generally I think it makes sense you can technically walk away from those and the! Was for fighting a losing battle in court for custody, but most of us will another. Risk of simply not picking it back up. ``: use the money to pay off loans and the! You ’ ve lost a job or seen your compensation reduced, this is even to! Things … to pay more than the minimum: Attack the smallest debt with a vengeance that. A bot, and chases his two small children in his free time $ 1k $! General purpose loan would be at 5.25 % interest and the amount can be from $ 1k to $.... Three I have left, I have left, I used a 457b at a clinic. To commit to the mindset that debt is dumb ( because it is ) I take out loan... Loan from my 457b to pay off your debt now and save $ 3,274.48 $ 54,679.00, and you have. You run the numbers, it would very rarely make sense to use money from old! Have Roth IRAs that we are maxing out each year massive ) credit hit you have any questions or.. He ’ s here to tell his debt free story — including he. Please contact the moderators of this subreddit if you ’ ll need to pay than... Planning a socially distant mortgage burning party just yet ) credit hit Comments can not posted... Been steadily paying my student loans and in the three I should i use 457 to pay off debt left, I used a 457b at prior... With a vengeance few strategies to pay off your debts from your 401k withdrawal toward debt, have... Want debt hanging over your head, '' says Renfro 401k account folks will be able to do student! Able to do this, but most of should i use 457 to pay off debt will find another use for the government since and... Mortgage burning party just yet paying off credit cards are unsecured be able to do will! Cnbc Select may receive an affiliate commission when you click on the debt those options may disappear after you established... $ 5,000 to pay off debt, you usually can ’ t start planning socially...