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I have 30K in CC debt that I would need to get out of. My options are:

  • Cashing in a $60k annuity that doesn't return much, but has a penalty for withdrawal
  • Borrowing from a $150k 401K (I don't want to do this).
  • Refinancing my home with $75K of equity on a $157k appraisal.

My wife and I make a combined $135k annual salary, and we each contribute 10% to our 401Ks. We are already on a budget, and we are also paying college tuition for our children. The debt was accumulated over time, but we do not spend on credit cards now. We have been paying the debt down, but are unable to continue doing so with the tuition costs.

How I got to this situation was all special causes and from being laid off at a very bad time for us. Our son had a medical condition, and the COBRA plan would not cover everything. Cutting the Fat is not the cause here.

EDIT

I have transferred the high-interest ones to a zero interest for 18 months, and have done that several times. Never missed any payments on anything. The highest interest rate now is 16%. There would be a 10% penalty on an annuity withdrawal, plus taxes, which I will pay when I take the distribution. The 401K has no penalty, other than missing out on compounded interest and my company matched 100% up to 10% of income, so I don't want to screw that up.

  • Is the annuity already paying you? Does it have a cash value? Is the current cash value enough to cover the debt? – quid Feb 2 '17 at 3:50
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    More details please. As is, we don't know how much you can pay off monthly. How much the debt costs. How much the annuity is worth. How much equity you have in your home. How much it costs to borrow from your 401k. – Brythan Feb 2 '17 at 5:02
  • I agree with @Brythan, there's not enough info here. – Marshall Tigerus Feb 2 '17 at 17:31
  • Thanks for responding. The annuity is not already paying me. I am 52 years old. I was not going to pull the entire 60K out, just enough to cever the debt and taxes. I have 75K equity in my home, but we don't want to borrow from that at this time. My 401K is 150K, but as I said I would rather increase that as I get a very good company match. – Hillan4 Feb 2 '17 at 18:54
  • Stop paying your kids college. I know this may sound wrong but one thing for sure is that you will stop working one day and need to dump this debt. Whether or not they go to college or get a good paying job with that college degree is completely subjective. Some ideas: tighten up, sell a car (or a bunch of stuff that you got from this debt) and get out of debt as quickly as possible. Take some extra jobs and cut the fat. Stop going out to eat and drinking starbucks. These are just a few ways how we got out of 128,000 of debt in a couple years (over $50k of that was cc debt). – Japster24 Feb 2 '17 at 19:38
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Thirty thousand in credit card debt is a "big elephant to eat" so to speak. But you do it by taking a bite at a time. One positive is that you do not want to borrow from your 401K. Doing so is a horrible idea.

The first question you have to ask yourself and understand, is how you accumulated 30K in credit card debt in the first place? Most people get there by running up a relatively small amount, say 5K, and playing the zero transfer game a few times. Then add in a late payment, and a negative event or two (like the car breaking down or a trip to the emergency room) and poof a large amount of credit card debt.

Obviously, I have no idea if this is how you got there, and providing some insight might help. Also, your age, approximate income, and other debts might also help provide more insight. I assume you are still working and under age 59.5 as you are talking about borrowing from your 401K.

Where I come from is that my wife (then girlfriend) found ourselves under stifling debt a few years ago. When we married, we became very intentional and focused on ridding ourselves of debt and now sit completely debt free (including the house). During our debt payoff time, we lived off of less than 25% of our salary. We both took extra jobs when we were able. Intensity was our key.

If I were you, I would not refi the house. There are costs associated with this and why would you put more debt on your home?

I might cash out the annuity provided that there are no negative tax consequences and depending on how much you can get for it. Numbers are the key here. However, I feel like doing so will not retire this debt.

The first thing you need to do is get on a written budget. A game plan for spending and stick to it. If you are married, your spouse has to be part of this process. The budget has to be fresh each month, and each month you and your wife should meet. To deviate from the budget, you will also need to have a meeting. My wife and I still do this despite being debt free and enjoying very healthy incomes.

Secondly, it is about cutting expenses. Cable: off. No eating out or vacations. Cut back on cell phone plans, only basic clothing. Gift giving is of the $5 variety and only for those very close to you. Forget lattes, etc. Depending on your income I would cut 401K contributions to zero or only up to the company match (if your household income is above 150K/year).

Third, it is about earning more. Ebay, deliver pizzas, cut grass, overtime, whatever.

All extra dollars go to credit card balance reduction. At a minimum, you should find an extra $1000/month; however, I would shoot for 2K. If you can find 2K, you will be done with this in 13 months. I know the math doesn't work out for that, but once you get momentum, you find more.

How good will it feel to be out from under this oppression next March?

I know you can do this without cashing in the annuity or refinancing. Do you believe it?

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    the part about understanding why it happened is good, but the right turn into "get rid of cable, stop giving gifts, get a second job" will cause the OP to stop listening. Too extreme. – Kate Gregory Feb 2 '17 at 14:10
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    @KateGregory is 30K an extreme amount of credit card debt? Extreme problems require extreme measures. – Pete B. Feb 2 '17 at 14:27
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    I struggle to understand the logical and mathematical difference between "cutting 401(k) contributions to zero" and "take out a 401(k) loan". In the case of the former, obviously, no new deposits are made while the loans are paid off at their 16% rate. The latter kills the high interest, and keeps the deposits going. The stop-depositing option has a far biglier detrimental effect on the account than the loan. – JoeTaxpayer Feb 7 '17 at 20:48
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    The most obvious difference is that one does not have to repay non deposits when employment is terminated. Another reason is that non deposits act as a behavioral incentive to get rid of the debt and get back on track with retirement savings. Loans just don't cause people to act that way. I hope you would agree, in most situations, 30K in credit card debt calls for behavior modification. – Pete B. Feb 8 '17 at 12:50
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    @PeteB. The 10% going to the 401(k) is matched dollar for dollar. $10,000 in, doubles to $20,000 but costs $7500 (25% tax rate). And $10K can be borrowed out. Very tough to go against that. In general I agree, $30K means a behavior issue, but the story told here is one of tough choices, not bad ones. You still got my +1. A couple can and should put in some time to raise the extra money to kill this debt. – JoeTaxpayer Feb 9 '17 at 1:52
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You can take a out loan against your 401k, which means you won't be penalized for the withdrawal. You will have to pay that amount back though, but it can help since the interest will be lower than a lot of credit card rates. You could refinance your home if you can get a reasonable interest rate. You could also get a 0% APR balance transfer credit card and transfer the balance and pay it off that way. There are a lot of options. I would contact a Credit Counselor and explore further options. The main objective is to get you out of debt, not put you more in debt - whether that is refinancing your mortgage, cashing in an annuity, etc.

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    Sorry, but I disagree with most of this answer. Taking a 401(k) loan is generally a bad idea. It also might not be smart to take your existing unsecured debt and turn it into debt secured by your house. You can't really borrow your way out of debt; you need a plan to pay it off first, and then you can look at ways to reduce your rate in the interim, if practical. Finally, while it might be possible to find a good credit counselor, too many are shady debt consolidation loan companies that make the situation worse instead of better. – Ben Miller Feb 2 '17 at 15:26
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    Plus you miss out on the gains that you would have earned on the borrowed money. You get some of it back in the interest you pay yourself, but if you can afford to make the 401k repayment then you might as well just put that money toward the original debt. – D Stanley Feb 2 '17 at 16:19
  • do NOT do this! Not only will you miss out on 'opportunity cost', in most cases if you lose your job you have to pay this amount back immediately which will put you in a worse situation. – Japster24 Feb 2 '17 at 19:34
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    Taking out a loan doesn't eliminate any debt; it just moves the debt around. And in this case, it moves it to a worse place. – shoover Feb 2 '17 at 21:15
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    +1 At least this answer actually answers the question OP posed. Given the 3 options, this might be the best choice. Even though a 401k loan isn't ideal, it's certainly better than perpetually paying 16% in CC interest! (Unless you think you'll get at least a 16% return on your investment in the 401k, on average.) The 0% balance transfer is even better. Here's some good info about 401k loans: investopedia.com/articles/retirement/08/… – TTT Feb 9 '17 at 16:10
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First of all a big thumbs up for Ben's answer.

A few small things you can do to help you on your way. Hopefully you are not more in debt that 6 months of salary in debt because that is a really tough road.

  1. first thing you need to do is get some professional help. The National Foundation for Credit Counseling (NFCC) offers free or low-cost debt counseling to help you through the process. Visit them at NFCC.org or call 1-800-388-2227 to find a local affiliate office near you.

  2. You might want to only use cash for a while. If not and you have a credit card with no balance always use that card because it will be interest free. Remember if you use credit cards as a payment system and not credit, you actually get free interest. If you roll even a penny over into the next statement you are paying interest day one of each purchase.

  3. Pay credit cards with highest interest rate first an pay minimums to others

  4. This one I like the best. As you get money pay your credit card. You interest is being compounded daily. Pay your cards when you have money, not when they are due.

  5. Have a mindset that reminds how much something is really going to cost you If you plan on taking 3 years to get out of debt and you buy something for $100 that is really costs you $156.08 Three years of compound 16% interest.

5b. Conversely if you sell something for $100 on eBay that is like selling something for $156.08.

  • No one named Ben answered this question. Did you mean Pete B.'s answer? – Ben Miller Feb 7 '17 at 22:50
  • You edited Pete's. that's the source of confusion . – JoeTaxpayer Feb 9 '17 at 1:25
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Please take a look a Dave Ramsey's Baby Step plan. It has all the details that you need to clean up your personal finance situation. None of your options are good.

As some of the other answers mentioned, behavior modification is the key. Any idea will be worthless if you just wind up in debt again. Many, many people, including me, have made the change using Dave's plan. You can too.

With regard to helping your son with tuition, are there better or cheaper options? It does not make sense to put yourself in financial peril in order to cover college expenses. I understand that is a tough decision but he is a man now and needs to be part of the real world solution.

Following the Baby Steps:

  1. Save $1000 as a starter emergency fund
  2. Focus on paying off your debts using your significant income. Stop the 401k investment for awhile, cut back on your other expenses. On 130k, you can pay the full 30k off in a year or two even with college expenses.
  3. Build an emergency fund of 3 to 6 months expenses
  4. Start your 401k savings again

The biggest factor is a belief that you can fix the mess. 30k is not really that much, with a good plan and focus, you can clean it up. Good luck.

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