I need some financial advice.

[Nadienne]

I might be getting a new job, and I'm considering cashing out my pension plan instead of rolling it over to my new employer. My reasoning is that I have a monster credit card debt on my back. I've considered consolidating. (The places I have talked to about that want complete control of my finances. Plus, I'm not certain I can commit to their payment schedule.) I've considered getting a loan, which I might do if I decide against cashing out my pension plan.

I know there's an early withdrawal penalty, at least 10%, plus it will be treated as income and taxed that way. At this point, it is valued at roughly $7000. It's a profit-sharing plan.

What do you guys think?

[Nite Owl]

1. Is the percentage you will

pay on the debt higher than the cost of the withdrawal?

[Nadienne]

5. I'm not certain

I don't know what all the cost of an early withdrawal will be...

[ET Awful]

2. Not only do you have early withdrawal penaltiies, but . . .

you will also have to pay income tax on that money that wasn't paid when it went into profit sharing, as that is taken from pre-tax income. edit: sorry, didn't notice you'd already mentioned the taxes.

Odds are that after taxes (I don't have exact tables available to me now), you would probably only take home 60% of that $7,000.

I guess it would all depend on how much credit card debt you have and how the rest of your financial picture looks.

[King Of Paperboys]

3. Get Clark-Smart

www.clarkhoward.com

I'd bet you can find the answer there... if not, you can email him and he or one of his assistants will help!

[Nadienne]

13. Thank you

I'm looking there now!

[Shopaholic]

4. Can you get out of debt. . .

and stay out of debt if you pay off your bills? Will this new job put you in a position where you won't be charging up new debt on your credit cards once you get it all paid off? It's a tough decision--I faced a similar predicament several years ago. I'm happy to report that I'm debt-free now and intend on staying that way from here on out. Also--how old are you and how far away from retirement are you? Do you have any savings other than this retirement account? These are all important facts to take into consideration before you make your final decision.

[Nadienne]

10. I will be making more money.

It is very like that I will be able to stay out of debt, once I am out of it... But right now, I am just making enough to make ends meet. Which is why I got into this mess. :(

I'm a loooong time away from retirement. 26 yrs old.

[Lydia Leftcoast]

6. I don't know how old you are, but I recently heard someone say

convincingly that the younger you are, the better off you'll be becoming totally debt-free and then using the money you used to use to pay off your debts to acquire property and financial assets.

If 60% of $7000 would make you debt-free (and if you have only $7000 in your pension fund, you probably are young), go for it. You could use the money that is no longer going to debt payments in order to accelerate contributions to your new employer's pension fund.

It's a thought, since I know all to well about the debt trap and how you can start to feel like a Third World country, never quite making enough to pay your debts.

By the way, I think the tax treatment of money taken out when leaving a job and money just plain withdrawn before the age of 59.5 differs, so you might want to ask the IRS exactly what the tax consequences would be.

[mopinko]

7. i say keep it in the pension plan

pretend it is not even there. i know how i am, i pay off the cards, and just run them back up. regardless of the math, the human equation is what matters.

[happynewyear]

8. depends on how big the debt is

I was in your position a number of years ago. What I did was cash out (there was no penalty) and I put about 1/2 of it into an IRA.

I still have the money, but now it isn't $5,000.00 anymore. I had it invested in the stock market 1995-2000 and pulled it out. Its a whole lot bigger now than it was before, thats all I can say and I am very glad I did not spend it all which would have been very easy to do.

Try aiming for a lower payment amount hedged with part of this pension amount.

If withdrawal penalties are involved, you might be better off rolling the whole thing into an IRA and paying on that debt. If you get to the point that you cannot pay and you need the $, it will still be there.

[Maine-i-acs]

9. Roll it over THEN borrow from it...

many 401Ks or equivalent accounts will let you borrow from the account, and pay back with either very low interest, or completely interest-free. Check with your new employer.

If there's a long grace period at the new place, see if your current employer's 401K will let you do the same.

The numbers will work out in your favor if you do it this way. Instead of paying a high-interest CC loan, you can pay back your 401K loan - oftentimes with pre-tax money - at little or no interest!

[denverbill]

14. I'll ditto that one.

If they do 401K loans, it's the obvious choice. No penalties, no taxes, no more credit card companies hounding you.

[trof]

16. 3rd vote for that plan, PLUS:

Whatever interest you pay will be to YOU!
I've done this a few times. You can usually borrow up to half of your 401-K.

[gpandas]

20. fourth vote but ...

this is a temporary fix to the problem you have, which is consuming more than you can pay for. you need to apply the concept of delayed gratification, a concept unfamiliar to most americans. it is not good to borrow, save it for real emergencies.

[russian33]

11. I cashed mine out a few years ago...

..but I was only 22 back then. I paid it to get a new place when I was moving to NYC...granted I got creamed with taxes and penalties, but I used the money for a new apartment's rent, security and paid off some debt...since then I built up my 401K again, so it worked out...

[StopThief]

12. Unless you are in danger of declaring bankruptcy. . . .

do NOT empty your 401K. I know you are only 26, but that is what makes the investment so valuable. It has almost 40 years to grow. I can't stress enough that cashing it out is a really bad long term idea.

[TexasBushwhacker]

15. Check this out about getting and staying out of debt

http://credit.about.com/library/weekly/topicmenu.htm

[2Design]

17. move your credit card debt to one or more cards at zero interest

or at least low interest....and start paying them down. You will have 6 months low interest....then move to another one....just keep track of when low interest is over and more before then....

places that say they will help you are making money off your troubles unless you go to government run credit card counseling...

The penalty on cashing out your pension plan and income tax.....
10% + 15%minimum bracket = 25%

If you can pay off current card by transfer of money to new card, save old card....as the time on new card for low interest starts to draw near, you call old card and see if they have special rate for you....

You can gradually get your debt paid down over seveal years this way. Just have to stop charging anything new....

[Nadienne]

18. Thanks to all of you for your replies.

I haven't decided on a definite course of action, but I'm at least I know longer have the frantic, no-good-options feeling... Or at least I'm no longer frantic about it.

:-)

Thanks!

[Nikia]

19. Be careful. Taxes can get you

My friend is still paying on his taxes from four years ago from taking his 401K money. Be sure when you get the money, if you do this, to know how much you will owe in taxes. Set this money aside. Do not use the money that you will need to pay your taxes. It is very important that you are able to pay your taxes.

[AP]

22. Tax liens come before anything, and they can't be dissolved in bankruptcy.

IIRC.

So, yes, you do not want to owe tax money to the government.

It would be crazy to have converted credit card debt to a tax lien.

Bankruptcy could disolve a big chunk of credit card debt, but it can't dissolve a tax lien.

Yikes.

[AP]

21. You'll need that money when you retire. Can't you get a lower interest

loan (that's lower than the opportunity cost of losing that pension) to pay down the credit card bill?

You definitely want to get rid of that loan (what's it at 17%?) but remember, credit card debt is unsecured. If you start replacing that with money that is secured (by, eg, your house) or that gives you security (your pension) then you're paying a big price.

I'd sell stuff on ebay before I sold my retirement savings or borrowed against something like my house.

But, I think I'd rather take out a second mortgage to pay off credit card debt before I sold me retirement savings.