Financial Advise...

[cpals]

I know this isn't really the best place to look for financial help, but I know a couple poeople know their stuff on here, plus its more of just to get opinions.

Okay, I recently 'retired' from my job and I'll be getting a lump some of money from my stock sharing plan that I was either going to rollover and create an IRA at my bank or I could just cash it out (don't know the exact penalty of doing that). My current company doesn't have a 401k or anything so I can't roll it over into that.

Now, I also have a pretty large amount of credit debt that I owe and am slowly paying it off every month, but it's going to take a while and the monthly 'service charge' this month was $30 so that hurts too. I would like to get it paid off completely and start fresh, but I'm not sure if that would be the most financially sound decision to make. The retirement income if I cashed it out would about pay the rest of what I owe on my credit card.

So I have two options:
1. Put the money in an IRA and slowly pay the credt debt off, but I would think that the finance charges on the cards would be worse than the the positives of having the IRA.

2. Pay off the credit cards and then every month start to put money away into an IRA.

I'm 23 so it's not like I'm going to retire anytime soon, but it's always good to think about the future. Besides my credit cards, my only big debt is my car which should be paid off in a year or two.

Thanks for reading.

 

[Nocturnal]

If you don't get the answer you're looking for try the obesewallet forums, they have a forum specifically for financial discussions.

 

[GTaudiophile]

Option 2! Get rid of your debt first before it snowballs. Then begin saving. It's never too early to begin saving for retirement. A little debt is okay, as long as the total interest payments on that debt are less than the interest you are making on investments. Best not to have any debt at all though.

 

[Miramonti]

If you have a lot of debt, I would pay atleast 90% off if you can. You may not get another chance like this to get that monkey off your back, and given how ruthless debtors are these days and that interest rates are most likely heading up, I'd consider paying off the debt (and not taking on more) as the most responsible and advantageous thing for you to do at this point.

You have plenty of time to add to a retirement account, and essentially what you're considering is starting a retirement account with credit card money, which makes little sense imo.

 

[cpals]

Okay, so if I do cash out and they take out like 20% or something (how is that done because I think when I called my company she said they just mail me a check for the whole thing)... do I have to file something special right away or is this something I put on my tax return for next year?

Edit: I had already told the lady in my old company's retirement dept. that I was going to roll it over into an IRA and she said they would mail it out to me with my name on it and then I would have to roll it into my bank within 90 days or else I get penalized with the taxes. So I guess I just won't roll it over, but how do they take the money out of it?? Do I have to let my company know that I changed my mind and am just going to cash it out?

Sorry for being a noob in the finance area... I'm just trying to become more financially responsible. Thanks.

 

[Miramonti]

Originally posted by: cpals
Okay, so if I do cash out and they take out like 20% or something (how is that done because I think when I called my company she said they just mail me a check for the whole thing)... do I have to file something special right away or is this something I put on my tax return for next year?

Edit: I had already told the lady in my old company's retirement dept. that I was going to roll it over into an IRA and she said they would mail it out to me with my name on it and then I would have to roll it into my bank within 90 days or else I get penalized with the taxes. So I guess I just won't roll it over, but how do they take the money out of it?? Do I have to let my company know that I changed my mind and am just going to cash it out?

Sorry for being a noob in the finance area... I'm just trying to become more financially responsible. Thanks.

If it wasn't in a retirement account previously, then you shouldn't be penalized for keeping it out of one. If it was part of a retirement/401k account, then you probably will but I don't know much about this.

If they were not part of the retirement account, you will still need to pay capital gains taxes on it. For example if you made 20k salary for the year and sold 10k worth of stock options, then your income would be 30k and that is what would be used to establish your tax rate for your tax return, and that is what you would pay taxes on. I'm not too familiar with the details tho.

So I guess it definitely makes a difference of whether or not you would be penalized and by how much before you decide what to do. I was under the impression they were just stock options, but if its part of a 401k already, it complicates the decision.

 

[richardycc]

it sucks that your current employer doesnt have a 401k, if else you could rollover the money, and take a loan out(you can only take 1/2 out up to certain amount, assuming the amount is enough to pay off the cc debts), that way, you dont have to pay any penalty.

 

[aplefka]

I'd pay off the debt first, then start working towards the retirement fund. You're 23. That's when most people start their careers. For you to have the opportunity to pay your debt AND be able to get a new job/career to start saving for retirement is golden. Go for option 2.

 

[DaWhim]

you can't be saving when you are in debt. pay it off first.

 

[cpals]

Thanks for the advice. I need to call my old company today to find out what to do.

 

[cpals]

Bump for new eyes.

 

[richardycc]

is it true that one can put the money taken out from a retirement plan back into another qualify retirement plan within 6 months to avoid any penalty? And the money doesn't have to be the same, ie: I can put the money into some type of investment for less than 6months, and then roll the money back into another retirement plan and keep the profit without any penalty?

 

[cpals]

Originally posted by: richardycc
is it true that one can put the money taken out from a retirement plan back into another qualify retirement plan within 6 months to avoid any penalty? And the money doesn't have to be the same, ie: I can put the money into some type of investment for less than 6months, and then roll the money back into another retirement plan and keep the profit without any penalty?

For me, it's like 60 or 90 days I have to roll the money over or I get the tax charges.

 

[flamingelephant]

no point in saving if you owe, especially at credit card interest rates! PAY OFF THE CREDIT CARDS FIRST, then put about 3-6 months in a money market fund as a emergency reserve, then start saving for retirement. The only exeption to this would be if an employer matches contributions to a retirement fund, then you should be putting money in there because the employer is conrtributing free money

 

[Zombie]

how do you retire at 23 and still have debt ?

 

[dullard]

Looks like you need major advice on many levels. The best advice would rely on information we don't have from your post. If the information is too personal, I can see why you may want to keep it private. Thus I'll just make some broad comments which may or may not apply to you.

1) You didn't say how much you owe on CCs - other than to say it is pretty large. Are we talking $1,000, $10,000, or $100,000? You also didn't mention the reason why you left your job, if you can get a new job, or how much salary you will be able to obtain. The rule of thumb is this: if you owe more in debt (and that debt is >$20,000 or so) than you will likely earn in salary in the next year, you might be best off declaring bankruptcy. I just wanted to throw this out as an option. However, since you have a retirement account to use, I think you may be better of doing something else.

2) The penalty is 10% (plus you have to pay taxes on the amount since you haven't done it yet). So in total, we are talking maybe 25% penalty. Your credit cards probably have a significant interest rate (plus fees). I bet that cost will quickly be more than your IRA penalty. Heck the typical high interest credit card + fees will offset that 25% in just one year. So if you have high interest credit cards, you may very well be better off taking the penalty and paying them off.

3) Carrying this CC debt is a bad thing. Not only do you owe money on it, but your credit rating probably sucks. That means you are paying more for any car loan, house mortgage, and even car insurance is way higher that the typical person. There are indirect ways that paying off AND keeping off CC debt is a good thing. We can certainly help. Just tell us the area you have trouble with (income too low, spending too high, or both).

4) Why do you have such massive CC debt. These are not meant to be a long term loan. 65% of people pay their credit cards off in full virtually every month. Only 7% of people are in situations like yourself. Why? There are better loans out there. Take advantage of them. Stop using the CC as a loan.

5) The most common excuse I hear on Anandtech is that they "needed" the CC for education or for medical expenses. If this applys to you, #4 applys as well, there are better loans. But you are in luck. The 10% early withdrawl fee is waived for education and medical expenses. One more reason to use your retirement funds.

6) Lecture time. Get a job, get two jobs if you need. Spend less, you don't need to go out or to buy new electronic equipment, etc. Get your spending under control. Heck if you need to, sell blood or sell plasma. There are ALWAYS ways to make your income match your expenses. That way you won't have CC debt any more.

 

[cpals]

Originally posted by: Zombie
how do you retire at 23 and still have debt ?

I worked at my old job for six years and was 'vested' which means I get into their employee profit sharing plan (they give me stock for working there). And the only way to get that money was to retire (aka - not quit). So I'm retired.

It's not that I'm not going to be working anymore... I already have a new job, but it's a small family owned company and they do not have any retirement options so I can't roll the money over.

 

[Budmantom]

#2 and don't use the cc's.




Tom