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PennySaved
1000+ Penny Miser Member
USA
1720 Posts |
 Posted - 11/06/2009 : 07:22:20
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I have a couple of friends who have been taking loans against their 401k to pay off credit cards
I recommended against it
1 You become a further slave to your job; if you quit or get fired, you would have to pay all that money back to your 401k or have to pay tax penalties (if a certain age)
2 The credit cards may shut down your credit cards after you pay them off.
What are your thoughts? I thought it was a bad idea but maybe I am missing something.
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SELLING COPPER PENNIES 1.4X FACE SHIPPED......“I sincerely believe that banking establishments are more dangerous than standing armies, and that the principles of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale” Thomas Jefferson |
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Lemon Thrower
1000+ Penny Miser Member
USA
1588 Posts |
Posted - 11/06/2009 : 08:40:01
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quote:
Originally posted by PennySaved
I have a couple of friends who have been taking loans against their 401k to pay off credit cards
I recommended against it
1 You become a further slave to your job; if you quit or get fired, you would have to pay all that money back to your 401k or have to pay tax penalties (if a certain age)
2 The credit cards may shut down your credit cards after you pay them off.
What are your thoughts? I thought it was a bad idea but maybe I am missing something.
another one is credit card debt can be renegotiated or wiped out in BR. 401k is protected in BR i think.
your points are valid but would have to be weighed against the value of being free of these debts. the interest rates on the credit cards is insane so economically this is wise. the stock market is going nowhere for a long time and you'll lose what you earn in the market to eventual taxes so i like this idea generally.
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Buying:
Peace/Morgan G+ at $15.00
copper cents at 1.3X
wheat pennies at 3X
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daviscfad
1000+ Penny Miser Member
USA
1664 Posts |
Posted - 11/06/2009 : 08:49:25
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| the best thing anyone can do is get credit cards as far away from you as possible. as far as how to get them paid off i think wants your tired of it you do what it takes to lift the burden |
Inquiring minds want to know |
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Mcprice302
Penny Collector Member
USA
404 Posts |
Posted - 11/06/2009 : 08:58:03
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quote:
Originally posted by PennySaved
2 The credit cards may shut down your credit cards after you pay them off.
Whats bad about that? Call me old fashioned (although I'm just 23) but I was taught that if you couldnt buy it in cash on the spot, you shouldn't buy it at all. I have never owned a CC and never will. I fail to see why someone who's in debt to a CC company would ever want to keep it afterwards, even if they were to get it paid off. Isn't that why they got in debt in the first place? Or am I the one missing something here? |
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HoardCopperByTheTon
Administrator
USA
6807 Posts |
Posted - 11/06/2009 : 09:17:28
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A lot of them are raising their rates to try to get them completely jacked up before the new law goes into effect next year to prevent them from hiking the rate arbitrarily. Of course generally when they bump the rate, the consumer has the option to close that account and pay off the balance under the current terms.  |
If your percentages are low.. just sort more. If your percentages are high.. just sort more.
Now selling Copper pennies. 1.6x plus shipping. Limited amounts available. |
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PennySaved
1000+ Penny Miser Member
USA
1720 Posts |
Posted - 11/06/2009 : 09:44:42
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Well your credit score is based on the ratio of revolving debt to the amount of credit available
When you shut down credit cards or the credit card shuts down your credit card, it will affect the ratio and can actually make your credit worse.
That is why they say it is good to use your credit cards a little and pay them right back off so you don't have the accounts closed. |
SELLING COPPER PENNIES 1.4X FACE SHIPPED......“I sincerely believe that banking establishments are more dangerous than standing armies, and that the principles of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale” Thomas Jefferson |
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Bluegill
1000+ Penny Miser Member
USA
1964 Posts |
Posted - 11/06/2009 : 09:52:57
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quote:
Originally posted by Mcprice302
quote:
Originally posted by PennySaved
2 The credit cards may shut down your credit cards after you pay them off.
Whats bad about that? Call me old fashioned (although I'm just 23) but I was taught that if you couldnt buy it in cash on the spot, you shouldn't buy it at all. I have never owned a CC and never will. I fail to see why someone who's in debt to a CC company would ever want to keep it afterwards, even if they were to get it paid off. Isn't that why they got in debt in the first place? Or am I the one missing something here?
One would think... I got rid of all my CC's in July of '98. Don't miss them at all. If one needs credit to live, one is living beyond their means.
As far as needing CC's to maintain a good credit score, says who? the CC companies... My credit score is as good as it comes, and like I said, I haven't had a CC in over 11 years. Car loans and mortgage's will do just fine.
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Edited by - Bluegill on 11/06/2009 09:53:50 |
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Country
1000+ Penny Miser Member
USA
3121 Posts |
Posted - 11/06/2009 : 09:54:14
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Taking a loan from your IRA or 401K means you get taxed TWICE on the money. When you repay, you are repaying with after tax money into an IRA or 401K that will get "taxed again" when you are 55 or older.
Never use your retirement money as a vehicle to support your spending habits of today. It does not matter whether your retirement money is in an IRA or in a stash of GOLD. Its purpose is for you to live on in your retirement years. When you no longer work for a living you will need it.
Live below your means when you are young and you will live above your means when you are older. |
---> Come to the new and improved realcent: http://realcent.org
The things that will destroy America are prosperity-at-any-price, peace-at-any-price, safety-first instead of duty-first, the love of soft living, and the get-rich-quick theory of life.
– Theodore Roosevelt
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barrytrot
Administrator
USA
721 Posts |
Posted - 11/06/2009 : 09:56:20
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quote:
Originally posted by Bluegill
quote:
Originally posted by Mcprice302
quote:
Originally posted by PennySaved
2 The credit cards may shut down your credit cards after you pay them off.
Whats bad about that? Call me old fashioned (although I'm just 23) but I was taught that if you couldnt buy it in cash on the spot, you shouldn't buy it at all. I have never owned a CC and never will. I fail to see why someone who's in debt to a CC company would ever want to keep it afterwards, even if they were to get it paid off. Isn't that why they got in debt in the first place? Or am I the one missing something here?
One would think... I got rid of all my CC's in July of '98. Don't miss them at all. If one needs credit to live, one is living beyond their means.
As far as needing CC's to maintain a good credit score, says who? the CC companies... My credit score is as good as it comes, and like I said, I haven't had a CC in over 11 years. Car loans and mortgage's will do just fine.
Unfortunately some things REQUIRE a credit card.
There are companies that don't take debit card (some rental car companies for example) and must have a credit card on file to use.
Other than that, I agree that using a credit card is not a good idea.
That being said, I have 5 of them, but we do pay them all off every month :) |
Edited by - barrytrot on 11/06/2009 09:56:40 |
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Lemon Thrower
1000+ Penny Miser Member
USA
1588 Posts |
Posted - 11/06/2009 : 09:59:05
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quote:
Originally posted by Mcprice302
quote:
Originally posted by PennySaved
2 The credit cards may shut down your credit cards after you pay them off.
Whats bad about that? Call me old fashioned (although I'm just 23) but I was taught that if you couldnt buy it in cash on the spot, you shouldn't buy it at all. I have never owned a CC and never will. I fail to see why someone who's in debt to a CC company would ever want to keep it afterwards, even if they were to get it paid off. Isn't that why they got in debt in the first place? Or am I the one missing something here?
try renting a car or buying a plane ticket with cash. |
Buying:
Peace/Morgan G+ at $15.00
copper cents at 1.3X
wheat pennies at 3X
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Country
1000+ Penny Miser Member
USA
3121 Posts |
Posted - 11/06/2009 : 10:02:31
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If you have good credit, there are plenty of credit cards that will give you CASH back. My AMEX gives me unlimited 5% CASH back on groceries, gas, and pharmacy; 1.5% on all other purchases (including shiny stuff). I use it all the time and pay the full balance monthly.
Having a credit card can be a good thing when you get CASH back.  |
---> Come to the new and improved realcent: http://realcent.org
The things that will destroy America are prosperity-at-any-price, peace-at-any-price, safety-first instead of duty-first, the love of soft living, and the get-rich-quick theory of life.
– Theodore Roosevelt
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Edited by - Country on 11/06/2009 10:04:35 |
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barrytrot
Administrator
USA
721 Posts |
Posted - 11/06/2009 : 10:07:36
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quote:
Originally posted by Country
If you have good credit, there are plenty of credit cards that will give you CASH back. My AMEX gives me unlimited 5% CASH back on groceries, gas, and pharmacy; 1.5% on all other purchases (including shiny stuff). I use it all the time and pay the full balance monthly.
Having a credit card can be a good thing when you get CASH back.
And, of course there is always the "direct dollar shipping" program from the Mint with which to pile on more rewards points :) |
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El Dee
Penny Hoarding Member
USA
547 Posts |
Posted - 11/06/2009 : 10:24:28
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Bad bad bad bad idea.
DON'T TOUCH your 401k EXCEPT to rollover into an IRA.
DON'T take a loan out against it.
What Country said earlier. You repay the loan with AFTER tax dollars, then pay tax AGAIN when you retire.
But mostly, you are inviting Murphy into your life. It is amazing how many people get laid off of otherwise lose their jobs after they take out a 401k loan.
Then, if it isn't repaid, which it wont be, the unpaid balance is income on your tax return, and a penalty equal to 10% of the balance is added to your tax on top of that.
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Trust the government? Ask an Indian. |
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PennySaved
1000+ Penny Miser Member
USA
1720 Posts |
Posted - 11/06/2009 : 11:33:35
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To be honest with you, credit cards are not that bad to have. You can use them as a tool. Before this whole mess happened, you use to be able to take a balance transfer for a small fee and put the money in a money market account getting 3%.
If you took $20,000 out at a $50 to $100 transfer fee and were getting 0% interest rate for 12 months, you use to be able to put that money in a money market account at 3% and you were actually making money off of the bank.
Its just those old days off easy money don't exist now. |
SELLING COPPER PENNIES 1.4X FACE SHIPPED......“I sincerely believe that banking establishments are more dangerous than standing armies, and that the principles of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale” Thomas Jefferson |
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EZ_Money
Penny Pincher Member
USA
125 Posts |
Posted - 11/06/2009 : 12:41:56
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| You don't get taxed twice when taking a loan against your 401k. The money in your 401k has not been taxed yet. You take a loan against it the loan is not taxed, yes you pay the loan back with after tax money. Therefore taxed once like normal income. The thing with paying your credit cards off with a 401k loan is your interest rate is probably way smaller, so you save on interest. The problem with most people is they take the 401k loan then see their credit cards have no balance and start using them again. Then you are left with two debts. It can help some people by lowering the interest rate and the repayment process usually gets taken directly out of your paycheck. Usually I would never advise taking a loan or taking out of retirement but if you compare that to the interest on your credit cards you are better off as long as you don't use the cards again. |
Running total:
Halves searched:$14,445.50
90% found: 122
40% found: 481
Dimes Searched $2100
Found: 5 |
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horgad
1000+ Penny Miser Member
USA
1641 Posts |
Posted - 11/06/2009 : 13:00:50
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If you go bankrupt, in most cases they can't touch your 401K. So using your 401K to pay off your debts could be a big mistake.
So many people are following this route 1. lose their job, 2. spend all their money, 3. raid their 401K, 4. go bankrupt. That is a waste of potentially thousands of dollars and order of 3 and 4 should be swapped.
I think the problem is denial that going bankrupt is a possibility. Better to except that possibilty sooner rather than later.
However if you really are solvent and have positive cash flow, it may not be a horrible idea. The better idea would be to not to have accumulated the debt in the first place, but keeping money earning less interest than the interest you are paying on a debt is generally a bad idea.
I know people that are paying say 6% for a house loan and keep a wad of cash in the bank earning 1%. And I am like you know you are losing 5% on that cash in bank and they are like no I am making 1%. 
IMHO |
Edited by - horgad on 11/06/2009 13:11:28 |
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Country
1000+ Penny Miser Member
USA
3121 Posts |
Posted - 11/06/2009 : 13:26:34
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quote:
Originally posted by EZ_Money
You don't get taxed twice when taking a loan against your 401k. The money in your 401k has not been taxed yet. You take a loan against it the loan is not taxed, yes you pay the loan back with after tax money. Therefore taxed once like normal income.
I have to disagree.
(1) The money in your 401K will be taxed at ordinary income at some later date at most likey higher tax rates.
(2) You take a 401K loan and you'll spend the money or pay off debts.
(3) When you pay back the 401K, you pay it back with current income you receive from your employer that will be taxed at the end of year no matter what you do with the money.
(4) The current income going into the 401K to pay off your loan goes into the 401K - only to be "taxed again at some later date".
(5) The 401K pay back money is taxed twice.
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The things that will destroy America are prosperity-at-any-price, peace-at-any-price, safety-first instead of duty-first, the love of soft living, and the get-rich-quick theory of life.
– Theodore Roosevelt
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pennypincher
Penny Sorter Member
67 Posts |
Posted - 11/06/2009 : 13:31:12
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I'll probably take a beating for this, but here goes!
Tell your friends to not take loans from their 401k's, tell them to withdrawal the money outright and pay the stupid irs penalty and get the balance of the money free and clear. Then they can pay off their credit cards and they're done. They obviously invested more money into their 401k's to begin with if they're in a world of debt right now. And hopefully they don't get themselves into that position again. People seem to think of 401ks are the holy grail or something. I know, I know, many of you will say this is counter-intuitive, but you're all assuming 401k's will be worth more than a pile of horse$#it in the future too. You have to take care of now, too many people think about nothing but the future and forget about now. 401k's are not secure and they're an unproven retirement vehicle. 401k investments added to the bubble that just popped since everyone and their brothers are now blindly dumping money in stocks because of 401k's. The one certainty of 401k "investments" is that Wall Street is getting rich off of your 401k. Wall Street gets to play with your money and get rich doing it. I know old people, especially the ones who are retired, want us young people to dump our hard earned money into 401k's. You know why? To keep their retirement funds secure. If us young people didn't dump our money into them, the older and retired people would be screwed because the prices wouldn't be as artificially high to fund their retirements. The idea that you can't touch your own money until your 59-1/2 is utter BS in the first place. The assumption is also incorrect that it's great because it's pre-tax investment, hoping you'll be in a lower tax bracket when you retire and actually pay taxes on it. That assumption is not guaranteed either. Tell your friends to take their lumps now and get out of debt now!  |
Edited by - pennypincher on 11/06/2009 13:35:07 |
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El Dee
Penny Hoarding Member
USA
547 Posts |
Posted - 11/06/2009 : 14:07:22
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quote:
Originally posted by EZ_Money
You don't get taxed twice when taking a loan against your 401k. The money in your 401k has not been taxed yet. You take a loan against it the loan is not taxed, yes you pay the loan back with after tax money.
What Country said...
You repay your 401K loan with after tax money.
TAXED ONCE!
In the future when you withdraw the money (after repaying it) you are taxed upon distribution.
TAXED TWICE!
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Trust the government? Ask an Indian. |
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El Dee
Penny Hoarding Member
USA
547 Posts |
Posted - 11/06/2009 : 14:18:28
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quote:
Originally posted by pennypincher
401k's are not secure and they're an unproven retirement vehicle. 401k investments added to the bubble that just popped since everyone and their brothers are now blindly dumping money in stocks because of 401k's. The one certainty of 401k "investments" is that Wall Street is getting rich off of your 401k. Wall Street gets to play with your money and get rich doing it. I know old people, especially the ones who are retired, want us young people to dump our hard earned money into 401k's. You know why? To keep their retirement funds secure. If us young people didn't dump our money into them, the older and retired people would be screwed because the prices wouldn't be as artificially high to fund their retirements.
If you believe this, than you definitely should not open a retirement account anywhere, anytime.
I would suggest rolling your 401K, when you can, into a SELF DIRECTED IRA, where you can invest in US Gold and silver coin, Treasuries, cash, bonds or stocks and not have anybody to blame but yourself.
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Trust the government? Ask an Indian. |
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EZ_Money
Penny Pincher Member
USA
125 Posts |
Posted - 11/06/2009 : 15:13:24
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| A loan is a loan. For a second forget it's even a 401k loan. If you take a loan you pay it back with money that is taxed (once). You put money in your 401k (not taxed) if you take a loan against it your money is still there, you took a loan against it not a withdrawl. You then pay the loan back. It has nothing to do with the 401k, it is collateral. If you do not pay the loan back it is taxed and you also then pay the penalty since it is then a withdrawl. If you didn't borrow from the 401k plan but you borrowed from a bank, you'd have to pay the bank back with after-tax dollars as well. If you don't borrow from your 401k plan but dip into your own savings, you have to replace those savings with after-tax dollars too. It is just a mind trick since you see the original 401k is untaxed. You can do a quick search and there are lots of documents outlining this... |
Running total:
Halves searched:$14,445.50
90% found: 122
40% found: 481
Dimes Searched $2100
Found: 5 |
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Lemon Thrower
1000+ Penny Miser Member
USA
1588 Posts |
Posted - 11/06/2009 : 15:24:52
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quote:
Originally posted by pennypincher
I'll probably take a beating for this, but here goes!
Tell your friends to not take loans from their 401k's, tell them to withdrawal the money outright and pay the stupid irs penalty and get the balance of the money free and clear. Then they can pay off their credit cards and they're done. They obviously invested more money into their 401k's to begin with if they're in a world of debt right now. And hopefully they don't get themselves into that position again. People seem to think of 401ks are the holy grail or something. I know, I know, many of you will say this is counter-intuitive, but you're all assuming 401k's will be worth more than a pile of horse$#it in the future too. You have to take care of now, too many people think about nothing but the future and forget about now. 401k's are not secure and they're an unproven retirement vehicle. 401k investments added to the bubble that just popped since everyone and their brothers are now blindly dumping money in stocks because of 401k's. The one certainty of 401k "investments" is that Wall Street is getting rich off of your 401k. Wall Street gets to play with your money and get rich doing it. I know old people, especially the ones who are retired, want us young people to dump our hard earned money into 401k's. You know why? To keep their retirement funds secure. If us young people didn't dump our money into them, the older and retired people would be screwed because the prices wouldn't be as artificially high to fund their retirements. The idea that you can't touch your own money until your 59-1/2 is utter BS in the first place. The assumption is also incorrect that it's great because it's pre-tax investment, hoping you'll be in a lower tax bracket when you retire and actually pay taxes on it. That assumption is not guaranteed either. Tell your friends to take their lumps now and get out of debt now!
i whole heartedly agree. breakign an IRA is not for everyone. in addition to the regular income taxes, there is a 10% penalty. if you break a roth then i think its just the 10%. I think paying the tax now makes sense when you consider taxes are going up A LOT and the government is likely to pull other stunts with IRA's and 401ks. It something i have been thinking about for a while. you need to pull the trigger on this by 12/31 or you'll get hit with next year's tax rates. btw, rich dad poor dad robert kiosaki has a similar philosophy. |
Buying:
Peace/Morgan G+ at $15.00
copper cents at 1.3X
wheat pennies at 3X
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Lemon Thrower
1000+ Penny Miser Member
USA
1588 Posts |
Posted - 11/06/2009 : 15:31:05
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quote:
Originally posted by El Dee
quote:
Originally posted by EZ_Money
You don't get taxed twice when taking a loan against your 401k. The money in your 401k has not been taxed yet. You take a loan against it the loan is not taxed, yes you pay the loan back with after tax money.
What Country said...
You repay your 401K loan with after tax money.
TAXED ONCE!
In the future when you withdraw the money (after repaying it) you are taxed upon distribution.
TAXED TWICE!
its not taxed twice.
1. money is put into the 401k without being taxed.
2. you get a loan - the loan you receive is not taxed.
3. lets say you change your mind and you never spend the loan money and just pay off the loan - no tax.
4. you retire at age 59 1/2 and break the 401k - this is the first time you are taxed. A single tax.
now lets change the facts a bit.
1. money is put into the 401k without being taxed.
2. you get a loan - the loan you receive is not taxed.
3. you spend the loan money on a new car instead of financing teh car at the dealer.
4. each week you earn money that is taxed, and you use this to repay the 401k loan. Yes, this is taxed, but its not any more of a tax than your pay would have been to pay off the loan with the car dealer.
4. you retire at age 59 1/2 and break the 401k - and you are taxed on the amount distributed. but the amount of the tax is the same if you had never taken the loan.
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Buying:
Peace/Morgan G+ at $15.00
copper cents at 1.3X
wheat pennies at 3X
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billo
Penny Collector Member
293 Posts |
Posted - 11/06/2009 : 15:34:15
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quote:
I think the problem is denial that going bankrupt is a possibility. Better to except that possibilty sooner rather than later.
In terms of pure self-interest, maybe. But it's part of the welfare state. We the "working poor" all end up paying for the ones that max out living the rich life beyond their means and then again take the easy way out while we keep struggling to cover their backsides. |
That's not a dollar, mate...THIS is a dollar.
http://www.sendcongressapinkslip.com/ |
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El Dee
Penny Hoarding Member
USA
547 Posts |
Posted - 11/06/2009 : 15:44:48
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quote:
Originally posted by EZ_Money
A loan is a loan. For a second forget it's even a 401k loan.
All right, I am forgetting it.
Any cash that is taken as a normal distribution from a 401K or a traditional IRA is taxable income.
JOHN DOE, AGE 55...
401K Balance, $10,000. All pre-tax.
Needs money down for a new Harley dresser. Takes a loan against his 401K, then diligently repays it with $10,000 deducted from his wages. Since it is after-tax money he is repaying it with, his gross earnings had to be $13,000 to come up with the net amount to repay the loan. Tax: $3,000
JOHN DOE, AGE 59 1/2...
Gets behind on the payments for the new Harley. Withdraws $10,000 as a normal distribution from his 401K. Taxable income, $10,000.
Tax: $3,000.
John's total tax: $6,000.
This begs the question of why you would ever repay this kind of arrangement. Like pennypincher said, just take the distribution and penalty. It would actually be cheaper.
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Trust the government? Ask an Indian. |
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Lemon Thrower
1000+ Penny Miser Member
USA
1588 Posts |
Posted - 11/06/2009 : 15:55:46
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quote:
Originally posted by El Dee
quote:
Originally posted by EZ_Money
A loan is a loan. For a second forget it's even a 401k loan.
All right, I am forgetting it.
Any cash that is taken as a normal distribution from a 401K or a traditional IRA is taxable income.
JOHN DOE, AGE 55...
401K Balance, $10,000. All pre-tax.
Needs money down for a new Harley dresser. Takes a loan against his 401K, then diligently repays it with $10,000 deducted from his wages. Since it is after-tax money he is repaying it with, his gross earnings had to be $13,000 to come up with the net amount to repay the loan. Tax: $3,000
JOHN DOE, AGE 59 1/2...
Gets behind on the payments for the new Harley. Withdraws $10,000 as a normal distribution from his 401K. Taxable income, $10,000.
Tax: $3,000.
John's total tax: $6,000.
This begs the question of why you would ever repay this kind of arrangement. Like pennypincher said, just take the distribution and penalty. It would actually be cheaper.
if he doesn't take the loan, he's still got to earn $13,000 pretax to buy the harley dresser, whatever that is. tax is $3000. Another $3000 when you retire. same result.
if you pull the money out now you pay the tax now that you would have paid at retirement. plus 10% penalty. ignoring the penalty you are just moving it up in time. |
Buying:
Peace/Morgan G+ at $15.00
copper cents at 1.3X
wheat pennies at 3X
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Paying off credit cards with a 401k loan
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