About a year and a half ago, my wife and I decided to consolidate our debt with a personal loan. Worked out great. Paid off a bunch of stuff with an ok interest rate (better than what we were paying to the cards) and an instant boost to our credit score. Fast forward to today...We're in the final stages of a divorce (I'll discuss that some other time) which states that we are to split the debt 50/50. First inclination is to get a separate personal loan to pay off my portion. I'd qualify for an even lower rate, especially with rates going down right now. But then I saw a provision in the new stimulus package that allows people to withdraw from their retirement accounts penalty free. Even the taxes will be waived if it's paid back in 3 years. So, I could have access to my money without all of the crap that usually gets taken out. I know it's generally frowned upon to touch retirement. But I really don't want this debt hanging around for another few years...especially when I'm going to be paying support, having to pay the mortgage on my own (until I get the house sold), etc. Is this the right thing to do...or should I just go with my original plan? I'm not interested in lectures on building debt. It was largely out of my control (see sentence 1 in paragraph 2). I just really like the idea of actually being debt free for the first time since I was in college. I spend a lot less now and since she's off the credit cards, I won't be letting those get out of control again.
All of these moves will be post-divorce so no legal implications? Just simply personal finance if should you pull from retirement to pay off debt?
yes and no. One of the stipulations is that we deal with this as quickly as possible. If not, we’re stuck paying the full amount every month until we do. Either way, I’m curious what the best option is being that those are really the only 2 options (personal loan or wipe it out with retirement) I should add...my job (assuming the economy survives and not a total collapse) will allow me to replenish the funds in a decent amount of time.
Your question is basically does boils down to this: Which is higher: interest cost on existing debt or return on existing investments. No one can answer that because return on existing investments is unknown, however, my guess is now that the market has crashed returns will be enormous based on today's invested dollar
If that is the case I would go personal loan and pay it back very quickly. You are then just breaking up the debt to "your" share and dealing with it as you please. Bringing in retirement mucks it up and can be difficult to replace as quickly as you can pay off a loan.
If you are sitting on a good amount of cash / money market on your 401k, I would go the personal loan route. Nobody knows for sure when the stock market will bottom giving the uncertainty of when things will get back to normal, but when they do, there is a possibility the market will get you great returns. We don't have to catch the absolute bottom. Just catch the right trend.
Yeah, I think this is the most logical move since he probably took a huge hit in 401k, removing now as it's down the drain is bad... Like even if it takes a few years + the return will hopefully be huge. Plus if he hits any rough patches he still has that money later (assuming he rebuys a house or something), like retirement should only be pulled to save existing investments (ie house). If this was a month ago and asked, and we had a look into the future on both ends this might be different.
If you go with the personal loan, what will be the interest rate and how quickly can you get the loan paid back?
Agreed. I was asked by a co-worker if he should cash out of 401K. I told him that giving the market pullback of 30% or so, it might be too late to sell but also to early to buy. Other than a 10% investment a week ago, I'm mostly sitting on the sidelines. There is no visibility whatsoever because of this Covid-19 crisis because nobody knows for certain when people are going back to work. 3-4 months?!?
I haven’t read the stimulus but if it’s anything like a lot of hurricane relief you may be able to get an SBA loan at 2%. That’s free money.
Why don’t you take a loan out from your 401k? You can take up to 50k our and pay it back over 5 years and you pay yourself back the interest and it doesn’t count on your credit.
I'm no expert by any means, and didn't read through every response, but I'd go personal loans, depending on the size of debt and whether you feel you could pay it back or not. I'm looking at it from this perspective: the bit of your money that's tied up in stocks could very well lose money. By pulling it in a personal loan, you're taking it out of a very volatile market, and essentially placing a hold on it. Then, you can throw it back in as the market gets better. As I said, I'm no expert on this, and I will never claim to be. Maybe it doesn't work this way at all.... Edit: it seems a lot of us have the same idea, just different perspective, which is interesting. It's all about figuring out when the market will be on the rise. You may catch it before it bottoms, but you may not pay back in time to ride the wave back up top.
OP, I’m really sorry to hear about the divorce. Not fun under any circumstances, but at a time like today... damn. Stay strong. Try to go w paralegals instead of lawyers if possible.
Bad time to remove. Don't do it. Debt is not always a bad thing. And you need to ride the market back up.
The issue is that the "paying it back quickly" might be a challenge. I'm taking the house with the stipulation that I have it ready to sell and on the market within 6 mos. Paying the mortgage, etc., on my own (with child support), is going to make things a little tighter than I'd like. Once I'm out of the house, that'll be easier. And with any luck, the housing market won't completely tank and I'll be able to make a profit. I get what everyone is saying and I appreciate all of the advice. The market will rebound and I'll miss out on the possibly large return. Still, the lure towards being debt free is strong. That's money I can put into the house to make it more valuable. It also becomes money (especially when I'm out of the house and in something less expensive every month) that I will put back towards my retirement. I also have some concern about the economy as a whole that will affect my job for the immediate future. Should something go really wrong and I'm out of work, wouldn't it be good to be debt free at that point? Thanks B-Bob. We actually used a mediator. I have a lawyer but he's really only drafting the decree for us. I had already signed him up early on when things looked like they were getting ugly. We've manage to keep things amicable enough to get to this point. We're basically in the final stretch...but the courts being closed is going to certainly delay some things it would appear. Personally, I'm through the worst. Been dating someone new and enjoying the time with the kids more. Just can't wait to be back in my house with my grill.
Must be the season. My wife(soon to be X) and I decided to end our relationship after being together since 1992 (married in 99). We just grew apart and I stuck around in the marriage to raise my kids. Now that my son is wrapping up HS and my daughter is in college, it was time to move on. Divorce was supposed to be final April 2 but this whole virus thing may drag it out a little. We've already split up finances and we sold off our house etc a couple years back when the first kid went off to college. Today I sent off a $4000 payment to one CC and in 2 weeks I'll send off another $2500 leaving me debt free. Funny thing about being quarantined in my girlfriends place, not having to pay rent, not filling up the van with gas, and not eating out... it freed up a lot of cash to pay off the credit cards that have been hanging around. Good luck Leroy. Hope you get out of the house before the economy gets too bad.
I'm with everyone else that says you shouldn't touch the 401K. That part is in there essentially for people who have lost their job and need that money to live. I'd continue with your original plan. Your 401k likely already took a hit, so you'd be taking out dollars at a loss anyway.
DONT YOU DARE TOUCH THAT 401K Caps off First, sorry to hear about the divorce. Get you a loan - or better yet, find a way to get a loan through the SBA. Very glad to see you wanting to pay down debt. Me personally, I would not touch the 401 but there are more questions than answers that would identify which option might be best. How much debt are we talking about? What's left on the original loan you took with your wife? Any other outstanding debts? Car notes? Mortgages? Credit cards?
