Grits and Shins Posted May 21, 2007 Share Posted May 21, 2007 Recently my employment status changed and I am considering roll over options with my previous 401K. Option 1: Roll the whole amount over into my new employer 401K pan Option 2: Roll the whole amount over into an existing IRA that contains a previous 401K rollover Option 3: Take a partial distribution and pay the penalties/taxes to pay down significant debt and roll the remainder over into new 401K and/or IRA I don't make a lot of money and since the wife quit working a couple of years ago (and she made quite a bit less than me) we have amassed a significant amount of debt (25K). We are struggling with cash flow and the higher than desired interest rates. Each month we are throwing a significant amount of money away in interest paid on outstanding debt. I'm in my mid 40s with 2 kids that have college years ahead and I currently have in the neighborhood of $325K in tax deferred investments (no non-tax deferred investments). Option 1 (roll over into new employer) would allow us to borrow from my 401K account to pay down all my existing credit card debt at a much more reasonable rate. I have heard about the evils of borrowing from your 401K plan but I figure it does no good to earn double digit interest if you are also paying out double digit interest, especially if the rate paid out is HIGHER than the rate earned. Option 2 (roll over into existing IRA) would allow me to take advantage of some cost savings. By increasing the account balances in 2 of my funds I could change the class of those particular funds and the expense ratio would reduce significantly for those funds. Clearly that will improve my individual yield/return but it is hard to quantify this benefit especially over time and in real dollars. Just how would I compute the impact of a reduced expense ratio anyway? Option 3 (partial distribution) is obviously the most impalitable in that I have to pay a 10% penalty plus outstanding taxes but has the advantage of a clean cut/new start ... but the one the wifeypoo favors the most. Really the point of this question was the portion I have highlighted in red above. I am considering rolling over just enough into my 401K to borrow half to pay down my debt ($60K) and then rolling the remainder over into one of my IRA funds to change its class for the lower expense ratio. I'm also not sure how I would choose which of my three funds to convert to the new class. Is it as simple as the one with the biggest reduction in expense ratio? Quote Link to comment Share on other sites More sharing options...
muck Posted May 21, 2007 Share Posted May 21, 2007 Call me at the office if you'd like. My number is in a PM you should have now. Quote Link to comment Share on other sites More sharing options...
Grimm74 Posted May 22, 2007 Share Posted May 22, 2007 Read real quick, but the one thing I noticed was paying off debt. To me that is a BIG fat no way. You pay a I think about 10% penalty on top of your person income tax. That is a huge apr for what ever debt you have. Quote Link to comment Share on other sites More sharing options...
yo mama Posted May 22, 2007 Share Posted May 22, 2007 I've cashed out a small 401k in the past and taken the tax hit, but I'd never recommend it on the scale you are considering... unless you owe bookies. Borrowing from your IRA is a probably a better way to go. You're paying the interest to yourself (at least, that's how it *should* work). As far as consolidation of your old retirement plans go, IMO that's a function of two things: (1) how likely are you to change jobs in the future; and (2) relative costs of each plan. Having a self-settled IRA is great for those who want a buckett to dump mulitple small retirement plans when they bounce around between jobs. (Happens a lot with dot-comers out here in CA). But if you see yourself with the same employer for the foreseeable future, then consolidating it there makes for one less thing to keep track of/maintain. Obviously, the costs of administration are an independent concern. But unless you are actively trading within your retirement account, those kinds of costs should be pretty minimal. Or, you can just call Muck. Quote Link to comment Share on other sites More sharing options...
Sugar Magnolia Posted May 22, 2007 Share Posted May 22, 2007 Recently my employment status changed and I am considering roll over options with my previous 401K. Option 1: Roll the whole amount over into my new employer 401K pan Option 2: Roll the whole amount over into an existing IRA that contains a previous 401K rollover Option 3: Take a partial distribution and pay the penalties/taxes to pay down significant debt and roll the remainder over into new 401K and/or IRA I don't make a lot of money and since the wife quit working a couple of years ago (and she made quite a bit less than me) we have amassed a significant amount of debt (25K). We are struggling with cash flow and the higher than desired interest rates. Each month we are throwing a significant amount of money away in interest paid on outstanding debt. I'm in my mid 40s with 2 kids that have college years ahead and I currently have in the neighborhood of $325K in tax deferred investments (no non-tax deferred investments). Option 1 (roll over into new employer) would allow us to borrow from my 401K account to pay down all my existing credit card debt at a much more reasonable rate. I have heard about the evils of borrowing from your 401K plan but I figure it does no good to earn double digit interest if you are also paying out double digit interest, especially if the rate paid out is HIGHER than the rate earned. Option 2 (roll over into existing IRA) would allow me to take advantage of some cost savings. By increasing the account balances in 2 of my funds I could change the class of those particular funds and the expense ratio would reduce significantly for those funds. Clearly that will improve my individual yield/return but it is hard to quantify this benefit especially over time and in real dollars. Just how would I compute the impact of a reduced expense ratio anyway? Option 3 (partial distribution) is obviously the most impalitable in that I have to pay a 10% penalty plus outstanding taxes but has the advantage of a clean cut/new start ... but the one the wifeypoo favors the most. Really the point of this question was the portion I have highlighted in red above. I am considering rolling over just enough into my 401K to borrow half to pay down my debt ($60K) and then rolling the remainder over into one of my IRA funds to change its class for the lower expense ratio. I'm also not sure how I would choose which of my three funds to convert to the new class. Is it as simple as the one with the biggest reduction in expense ratio? The best place to find the expense ratio is in the individual fund's prospectus Assuming you have about the same amount vested in each fund-yes it is as simple as the one with the lowest expense ratio. When you start with a clean slate, make sure you don't put yourself back into this kind of debt again-whatever that takes to control personal spending. Quote Link to comment Share on other sites More sharing options...
Coffeeman Posted May 22, 2007 Share Posted May 22, 2007 Option 2 (roll over into existing IRA) would allow me to take advantage of some cost savings. By increasing the account balances in 2 of my funds I could change the class of those particular funds and the expense ratio would reduce significantly for those funds. Clearly that will improve my individual yield/return but it is hard to quantify this benefit especially over time and in real dollars. Just how would I compute the impact of a reduced expense ratio anyway? I'm also not sure how I would choose which of my three funds to convert to the new class. Is it as simple as the one with the biggest reduction in expense ratio? First let me say, get thee to a pro financial planner, preferably one that is fee only! You don't want to mess this up, and the Huddle might not be place to get your 'final answer'. But muck might be a pro. Nkay? Second, good call to focus on expenses, no matter what option you choose. My friend, a ChFC/MBA/CFA, is the lead investment manager who handles the billions (yep, with a 'B') in our company's retirement fund, and overall smart guy. He has impressed upon me the importance of two things over all others: 1) keeping expenses low, and 2) asset allocation plus rebalancing. I keep arguing with him, saying how the Motley Fool will help me pick better stocks and beat the market. He just smiles nicely, shakes his head and says very few people beat the market, and I'm paying too much in either fees, taxes or both. And that I'm too heavy into certain stock classes. When he smiles like that, I know he's right and stop talking... Slowly but surely, these things can determine the size of your overall nest egg more than just about anything else. Good luck.... Quote Link to comment Share on other sites More sharing options...
Controller Posted May 22, 2007 Share Posted May 22, 2007 You should put your kids in daycare immediately so your wife can go to work full time and then pay off the debt. Your welcome. Quote Link to comment Share on other sites More sharing options...
Grits and Shins Posted May 22, 2007 Author Share Posted May 22, 2007 Just talked to muck ... he's sending me 25K to cover my debt. HE'S THE MAN It is amazing how beneficial some of these Huddle relationships can be! Thanks man! Quote Link to comment Share on other sites More sharing options...
Codwagon Posted May 22, 2007 Share Posted May 22, 2007 Hi Muck. Quote Link to comment Share on other sites More sharing options...
muck Posted May 22, 2007 Share Posted May 22, 2007 Just talked to muck ... he's sending me 25K to cover my debt. HE'S THE MAN It is amazing how beneficial some of these Huddle relationships can be! Thanks man! I'm here to help how ever I can... Quote Link to comment Share on other sites More sharing options...
PantherDave Posted May 22, 2007 Share Posted May 22, 2007 If you have equity in the house-get a home equity loan and pay off the 25K..and the interest paid on a home equity loan is also tax deductible as well. The monthly payment on 25K should be around $80-$120 a month if you attach it to say your 30 yr mortage, and maybe less. Quote Link to comment Share on other sites More sharing options...
Grits and Shins Posted May 22, 2007 Author Share Posted May 22, 2007 If you have equity in the house-get a home equity loan and pay off the 25K..and the interest paid on a home equity loan is also tax deductible as well. The monthly payment on 25K should be around $80-$120 a month if you attach it to say your 30 yr mortage, and maybe less. The thought of re-financing has also occurred to me. I'm currently paying around 7% and have approximately 10 years left on my note. I'm not particularily interested in going to a 30 year note and obviously to refinance there will be associated closing costs. In addition that spreads my debt out over decades when I'd prefer to get it paid off in 5 years or less. Quote Link to comment Share on other sites More sharing options...
PantherDave Posted May 22, 2007 Share Posted May 22, 2007 The thought of re-financing has also occurred to me. I'm currently paying around 7% and have approximately 10 years left on my note. I'm not particularily interested in going to a 30 year note and obviously to refinance there will be associated closing costs. In addition that spreads my debt out over decades when I'd prefer to get it paid off in 5 years or less. You don't have to re-finance, you should have equity built into your home from the payments you've already made.....the bank knows this and should give 25K against the equity in your home without the hassle of re-finace. They can attach the payment or make it seperate and spread out the hit over the 10 years you have remaining. Quote Link to comment Share on other sites More sharing options...
Grits and Shins Posted May 22, 2007 Author Share Posted May 22, 2007 You don't have to re-finance, you should have equity built into your home from the payments you've already made.....the bank knows this and should give 25K against the equity in your home without the hassle of re-finace. They can attach the payment or make it seperate and spread out the hit over the 10 years you have remaining. Texas is relatively new to the arena of equity loans (I do believe they allow them now though) ... do you still pay points (closing costs)? Quote Link to comment Share on other sites More sharing options...
PantherDave Posted May 22, 2007 Share Posted May 22, 2007 (edited) Texas is relatively new to the arena of equity loans (I do believe they allow them now though) ... do you still pay points (closing costs)? Some do and some don't, but you could still have that absorbed into the 25K and it would not really change the payment.....and the payments are Tax Deductible. I always think it's smart to use the equity in your home. My general rule is never borrow more than a third of what you can get. Example....Will loan you $100,000.00 against the equity in your home.....borrow 30K...payoff the 25K and use the left over 5K to let Peter pay Paul for awhile. Edited May 22, 2007 by PantherDave Quote Link to comment Share on other sites More sharing options...
geeteebee Posted May 22, 2007 Share Posted May 22, 2007 PD makes a good point. A home equity loan or HELOC (home equity line of credit) may be the way to go. But if you do this, you have to commit to changing your spending. The worst thing you can do is borrow on your mortgage, pay down your credit cards and then build up a balance on those cards again over the next few years. Same thing goes with taking a loan out against your 401k. Quote Link to comment Share on other sites More sharing options...
Grits and Shins Posted May 22, 2007 Author Share Posted May 22, 2007 PD makes a good point. A home equity loan or HELOC (home equity line of credit) may be the way to go. But if you do this, you have to commit to changing your spending. The worst thing you can do is borrow on your mortgage, pay down your credit cards and then build up a balance on those cards again over the next few years. Same thing goes with taking a loan out against your 401k. Yes. Several years ago I was working 50+ hours per week getting paid OT and my wife was working. Since then I have been curtailed to 40 hours and my wife no longer works. We did not adjust to the lower income in a very timely fashion, obviously. Quote Link to comment Share on other sites More sharing options...
tonorator Posted May 22, 2007 Share Posted May 22, 2007 if you are thinking home equity, good site here for info specific to texas. Quote Link to comment Share on other sites More sharing options...
proninja Posted June 12, 2007 Share Posted June 12, 2007 I'm here to help how ever I can... 4 years since you helped me out. Thanks again. July 6. Best decision I ever made. Quote Link to comment Share on other sites More sharing options...
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