I Would Like to Pay off a Few Credit Cards Using My 401(k). Is This a Wise Choice?

Posts Tagged ‘401(K)’

I Would Like to Pay off a Few Credit Cards Using My 401(k). Is This a Wise Choice?

|

Q: I’m 61 and Plan to Retire at Age 62, Though I Would Work Until 65 If needed. I would Like to Pay off a Few Credit Cards Using My 401(k). Is This a Wise Choice? I Have About $10,000 in Credit Card Debt.

A: I usually don’t like to see people use their 401(k) assets to pay off credit card debt because doing so shrinks a person’s retirement nest egg and most people face serious tax consequences by making early withdrawals from their retirement plans. In your case, however, you are already a year or two away from retirement, so it makes sense to aggressively pay down that credit card debt so that it’s not hanging over your head while you are working. Read on for more financial reasons why this is a smart strategy for you.

Tax Free Withdrawals

Also, only individuals who are under 59 ½ years of age have to pay tax on the amount withdrawn, plus a 10% penalty for making an early withdrawal from their 401(k) plans. In your case, however, since you are already 61 years old, you would not be subject to that 10% penalty, making the prospect of paying off your credit card debt an even more financially sound decision. In fact, there is an exception in the law that allows penalty-free distributions from your 401(k) provided you are 55 or older when you leave your job.

A Good Rate of Return

Lastly, paying down your credit card bills will generate an effective return rate that’s not likely to be matched by your retirement investing plan. In other words, you may be paying 15% or so interest rates on those credit cards. Therefore, that’s the return you’re essentially getting by paying off that consumer debt. Chances are your 401(k) is not earning 15% a year. So go ahead, feel comfortable in your choice to tap that 401(k) money and clear away that credit card debt. It’s a wise decision. Just be sure to manage you credit wisely in the future and avoid running up those credit card debts again during your Golden Years.

Pay off Debt or Put Money Away? Which is Better (brighthub.com)
6 Alternatives to Low-Rate Savings Accounts (money.usnews.com)

I Was thinking About Going with Edward Jones for a 401(k). Is this a Good Idea?

|

Author: The Money Coach

Q: I am 26 and Behind in the Investing Game. My Bank Offers a ROTH IRA and I’m Going With That. I Was thinking About Going with Edward Jones for a 401(k). Is this a Good Idea?

A: Congratulations on getting started investing. You’re not too late to the investing game: you’re right on time. A lot of 36, 46 and 56-year olds wish they’d started when they were 26, as you are. So don’t beat yourself up at all about your age. Glad to hear you’re starting a Roth IRA. It’s a great way to save for retirement. Regarding the 401(k), your investment options will be dictated primarily by the offerings that your employer has available. I can tell you in general that Edward Jones has a good reputation and is known for quality financial advice. However, the mutual funds you choose are equally important. So the main question you need to find out tackle is: based on my investment objectives, how much of my 401(k) should be in stocks, bonds, and cash? Then you can think about what funds or stocks to buy to match those objectives.

If you don’t have an adviser helping you, I’d strongly suggest that you get a professional to create a financial plan for you and offer you some specific recommendations based on your goals, risk tolerance and personal circumstances. You can get good help from the National Association of Personal Financial Advisors (http://www.napfa.org) or from the Financial Planning Association (http://www.fpanet.org).

Target-date mutual funds: Are they still right for you? (askamoneyexpert.com)
5 great money ideas for 2011 (askamoneyexpert.com)

I Have No Savings and am Struggling. What Should I Do?

|

Author: The Money Coach

Q: I’m 57 Years Old With Serious Arthritis. I Work With Severely Emotionally Disturbed Boys. I am Considering Resigning from This Position, Taking Money Out of my 401(k) Plan and Rolling it Over, Minus a Small Deduction for my Use and to Pay Off Debt. First I will Apply to Work in Education as a Teacher Assistant Making Less Money But Not As Difficult As My Current Job. I Have No Savings and am Struggling. What Should I Do?

A: Well, only you know whether or not it’s time for a major career shift. But based on what you said, you seem to be a bit overwhelmed in dealing with such an emotionally demanding job. You said you’ve worked there since 1997 and have been in the special education field since 1990, so the good news is that it’s not too much of a stretch to take the skills and experiences you’ve amassed over 20 years and apply them in the general education arena. From a financial standpoint, however, since you have no savings and described yourself as struggling to make ends meet, I would advise you to be cautious about taking money out of your 401(k) plan. You said you planned to roll it over. But into what? Your message didn’t indicate specifics. Into an IRA or something else? Read this post about Roth IRAs and this one as well about the benefits of having a 401(k).

What is the Best Way to Save Money and Get a Good Return on it?

|

Author: The Money Coach

Q: What is the Best Way to Save Money and Get a Good Return on it?

A: I recently wrote the following article that answers your question about saving money and getting a good return on it. Here is the article, entitled, Three Ways to Save More Money By Getting Paid to Save.

Three Ways to Save More Money By Getting Paid to Save

Everyone wants to save more money. Yet many cash-strapped people feel like they “can’t afford” to save. One way to make saving each month a little easier is by super-charging your savings – and making your money work as hard as you do. Here are three special ways to turbo-charge your savings. Try them and watch your savings grow faster than ever.

Strategy #1: Open an Individual Development Account or IDA

An Individual Development Account, or IDA, lets low-to-moderate income earners save money for a specific goal – such as a down payment on a house or starting a business – and receive matching funds from non-profit groups, corporations, and government agencies. Many IDAs provide a $3 to $1 match, meaning for every dollar you save, you get $3 in contributions. What’s the catch? You must agree to save money for a set period of time, usually at least one year. Some IDAs require you to set aside money for two or three years. Whatever the term, it’s worth it – because you’ll get rewarded with a huge cash bonus in the end.

The Payoff: If you save $100 a month, or $1,200 in one year, and your IDA has a $3 to $1 match, at the end of a year, you’ll receive a $3,600 contribution.

Resource: Visit http://www.IDAnetwork.org to find an institution in your area that offers Individual Development Accounts.

Strategy #2: Open a High-Yield Savings Account

Are you frustrated by savings accounts that are paying a paltry 0.5% or less in interest? Don’t despair. There are better yielding options available – if you shop around online. For example, the new InterestPlus Online Savings Account from Capital One currently carries a 1.45% Annual Percentage Yield (APY) – well above the national average. Plus, you can get a quarterly bonus equal to 10% of the interest you earned in the previous quarter. That’s a fantastic deal because you’re basically getting paid twice to save.

The Payoff: Keep $2,500 in your Capital One savings account each month, and you’ll earn an APY that’s roughly three times the amount that’s being offered elsewhere with other savings accounts.

Resource: Go to http://www.CapitalOne.com/directbanking to learn more about the no-fee InterestPlus Online Savings Account.

Strategy #3: Enroll in Your Company’s Retirement Savings Plan

If your company has a 401(k) or a 403(b) retirement savings plan, and you’re not contributing to it, you’re making a big financial mistake. Not only are you missing out on the opportunity to set aside money for your Golden Years, you’re also likely forgoing one of the best perks available to workers these days: a corporate match on your retirement contributions. Some companies offer a dollar for dollar match on the money you save for retirement, up to a certain percentage. Other firms offer 50 cents on the dollar. No matter the amount, it’s free money, so it’s foolish not to grab it.

The Payoff: Getting a dollar for dollar matching contribution from your employer’s 401(k) plan translates into a 100% return on your money. Guaranteed. You’ll never get that on Wall Street, or anyplace else.

Resource: Head to your company’s Human Resources Department today, and get the enrollment papers you need to sign up immediately for your 401(k) or 403(b) plan. If you’re already in the plan, consider boosting your contribution slightly. Also, read up on the benefits of having a retirement plan at the Employee Benefit Research Institute (http://www.ebri.org).

By using these three savings methods, you’ll become a more diligent saver, you’ll watch your money grow quickly, and you’ll make the process of saving money pain free. Best of all, pretty soon you’ll feel cash rich instead of cash-strapped.

Ask The Money Coach

Posts Tagged ‘401(K)’