Using credit card balance transfers to fund 401k?

[SeductivePig]

I currently deposit 5% of my paycheck into my 401k, and get a measly $2k/year employer match.

I really wanted to invest 20% of my paycheck to get the max contribution, but it would be difficult for me to meet my daily expenses that way.

I was thinking, I have plenty of credit card offers to get a balance transfer check with 0% apr for a year with a 3% fee - this would mean taking out $10,000 for $300 cost.

If I could save this money and then do a 20% contribution to my 401k, assuming the additional 15% contribution would get me an additional $13,200/year in funds, that equates to saving $3,300/year in taxes (25% tax bracket).

I would be losing $680/month in post tax income.
I would be saving $275/month in taxes.
I would be losing $25/month for the balance transfer fee.
My net loss per month would be $430, however I would be gaining $1100 + 8-10% gains (vanguard small/mid/large cap).

I would continue to pay off the $10,000 credit card over time, as it is 0%.

Is this a bad idea? I am 29 years old and had to pay off a lot of student loan debts so I'm playing catch up.

 

[dullard]

That is a very bad idea. Way too many things can go wrong.

• You could lose your job and be royalty screwed (hard to pay off all that debt and you have much less credit limit to fall back on).
• Stocks can easily go down instead of up. Even then, +10% estimates are pretty rosy in the best of times.
• You are ignoring the credit card interest after the 12 months go by and the 0% APR goes away.
• You might be destroying your credit score (depends on total credit limit).
• Remember 401k tax savings are not actually savings, they are delays. You just pay those taxes when you are wealthier and retired. So to lose real money now when you are young and poor just to delay taxes is not as good of a trade-off as you think.
• Etc.

Borrowing money to invest in stocks is one of the main causes of the stock market crash in the great depression. Don't do it unless you have plenty of money to spare. Especially don't gamble away your retirement just to do this.

If you have any money that could be going towards paying down the CC debt, use that for your 401k.

 

[TXHokie]

Crazy idea but can you borrow from your 401k? I'd hit that first so at least you're using your money to gain the match vs borrowing. The downside is if you lose your job, you must pay back the loan or you'll get hit with a huge tax penalty and you also lose out on the potential 8-10% "earning" on the amount borrowed. But those loan typically pay you back 3% so covers your loss on down years and huge gain from the match.

I do this to fund some annual home improvement project vs taking out HELOC and pay interest. I don't like to carry credit card debt.

 

[rcpratt]

This is the very worst idea that I have ever heard.

 

[Capt Caveman]

What a horrible idea. Pay off your student debt first.

 

[Drako]

Crazy and the opposite of praveen.

 

[Thump553]

You haven't really thought it out and it's a terrible idea as you laid it out. You missed a huge problem with the balance transfer system. Your credit card company is only going to keep the rate at 0% for a short time (my bank is one year) and then the rate skyrockets to the typical credit card mega-high rate.

 

[SeductivePig]

That is a very bad idea. Way too many things can go wrong.

• You could lose your job and be royalty screwed (hard to pay off all that debt and you have much less credit limit to fall back on).
• Stocks can easily go down instead of up. Even then, +10% estimates are pretty rosy in the best of times.
• You are ignoring the credit card interest after the 12 months go by and the 0% APR goes away.
• You might be destroying your credit score (depends on total credit limit).
• Remember 401k tax savings are not actually savings, they are delays. You just pay those taxes when you are wealthier and retired. So to lose real money now when you are young and poor just to delay taxes is not as good of a trade-off as you think.
• Etc.

Borrowing money to invest in stocks is one of the main causes of the stock market crash in the great depression. Don't do it unless you have plenty of money to spare. Especially don't gamble away your retirement just to do this.

If you have any money that could be going towards paying down the CC debt, use that for your 401k.

1) I have very stable employment - have ridden through the worst of downtimes.
2) My investment is purely into vanguard small/mid/large cap funds. It has never gone down, at least not recently.
3) In 12 months if I haven't paid off my card, I will pay $300 and transfer it to another 0% interest card and continue doing that until it's paid off. $300 is next to nothing when considering how much I am gaining in my 401k. The cards I have always offer me 0% interest for a year after I've paid them off.
4) I don't care about my credit score right now (it's already 700+).
5) I only intend to use the 401k as a loan if I am in a bind.

 

[dullard]

1) I have very stable employment - have ridden through the worst of downtimes.
2) My investment is purely into vanguard small/mid/large cap funds. It has never gone down, at least not recently.
3) In 12 months if I haven't paid off my card, I will pay $300 and transfer it to another 0% interest card and continue doing that until it's paid off. $300 is next to nothing when considering how much I am gaining in my 401k. The cards I have always offer me 0% interest for a year after I've paid them off.
4) I don't care about my credit score right now (it's already 700+).
5) I only intend to use the 401k as a loan if I am in a bind.

If you don't mind fees and your trading strategy can't lose, then why bother with a 401k? You clearly have out-thought me and the rest of the stock market. Look up trading on margin and be a millionaire quickly. Problem solved.

401k accounts aren't for loans. They are for retirement. Your priorities are out of alignment. Yes, they can be used as expensive loans in some cases, but that is not their purpose.

 

[Stopsignhank]

I currently deposit 5% of my paycheck into my 401k, and get a measly $2k/year employer match..

As everyone else said, it is a really bad idea. Plus you lost me at the bolded part above.

 

[Scarpozzi]

As everyone else said, it is a really bad idea. Plus you lost me at the bolded part above.

He's saying, he's getting $2k of free money if he invests at least that much of his paycheck per year.

OP:
Ok...so you're 29. If you have your student loans paid off, you're good.

Most people don't save. Those who save aggressively, typically save more than 10% of their income...but everyone's income differs....real estate costs/taxes/cost of living varies all over... I feel like if you can save $5-10k/year, you're doing good. If you can go higher, do it within reason...

You've got plenty of time to play catch up....consider that if you end up working a few extra years and postponing retirement, you'll end up with a lot more payout and will have time to even contribute more if they continue increased catch-up limits for 55 and older savers. Look at how much money you think you'll need in retirement (based on an annual salary) and if you have a spouse, consider what they may contribute to your potential wealth.... My wife and I are both saving 10-12% of our income annually and should be in good shape by the time we're ready to walk away from work.

I know you're doing the work 401k, think about splitting accounts...do the employer $2k match, but also consider setting up investments in a ROTH-IRA. You can open one through a credit union or many online websites. I have one that I started with around $5k and use for day trading that I've almost tripled in 3 years for fun....but have another one that's building slow growth (the way you're supposed to). You're better off having a traditional 401 AND a Roth IRA both so you can draw income in retirement from the Roth and not affect your taxable income....this is especially the case if you want to continue working and are drawing from other annuities... You can end up with some serious tax-free earnings when you have major expenses and need to pull money from your accounts. (like a new roof or that new convertible before your eyes go)

 

[dullard]

I think you are double counting the tax savings.

Salary: Assume $88,000 (so that 20% withdrawn is the $18,000 max contribution)
Current 5% rate: $366.67 withheld/month
Goal 20% rate: $1466.67 withheld/month
Net change: $1100 more withheld/month

Additional Tax Savings: $1100 * (0.25 + 0.07) = $352 (Assume 7% state income tax bracket)
Net after-tax change to you: $1100 - $352 = $748.

Cost to borrow $10000 over 12 months: $25/month average

Net after costs: $748 + $25 = $783 (NOT $430).

 

[Stopsignhank]

He's saying, he's getting $2k of free money if he invests at least that much of his paycheck per year.

I know what a 401K match is. What I meant was that the was calling 2K a MEASLY amount. I guarantee that I make a lot more that the OP, and I do not refer to $2,000 as Measly.

 

[OutHouse]

Put 6% in 401, put some in a IRA, put rest in the bank for liquid cash for emergencies.

Using credit cards to put in retirement pkans is a stupid idea.

 

[Mai72]

I'm going to be blunt here.

You don't make enough money. Period. This is exactly the issue with the middle class They think $70k is a lot of money. Many think $100k is a lot of money. It ain't. To get to $100k status like in the 80s/90s you need to make $250k today.

In your case you don't make enough. 40% of your income should be used for investments. Maybe you should take on a second job? Weekends maybe? It seems that you're looking for a shortcut and TBH they never work.

Increase your income. That's the answer.

 

[Paratus]

This is the very worst idea that I have ever heard.

Yes

 

[rcpratt]

40% of your income should be used for investments. Maybe you should take on a second job? Weekends maybe? It seems that you're looking for a shortcut and TBH they never work.

40%? I know you're ultra-conservative, but 40% is absurd by any standard.

 

[Mayne]

ye old using cc to pay a huge thing scenario...don't do it man.

 

[Drako]

40%? I know you're ultra-conservative, but 40% is absurd by any standard.

I guess he wants to retire before he hits 65.

 

[rcpratt]

I guess he wants to retire before he hits 65.

 

[Drako]

 

[sdifox]

So if you don't have the money to pay into it now within a fiscal year, how are you going to pay it off later?

 

[DaveSimmons]

Don't do this. Live within your means. If you want to invest more, either earn more money or spend less on other things.

Look at everything you spend money on now, and see if some of it could be eliminated. Before buying a new gadget (or anything else) ask yourself whether you really want it or if it would just be nice to have. Invest the savings.

 

[snoopy7548]

1) I have very stable employment - have ridden through the worst of downtimes.
2) My investment is purely into vanguard small/mid/large cap funds. It has never gone down, at least not recently.
3) In 12 months if I haven't paid off my card, I will pay $300 and transfer it to another 0% interest card and continue doing that until it's paid off. $300 is next to nothing when considering how much I am gaining in my 401k. The cards I have always offer me 0% interest for a year after I've paid them off.
4) I don't care about my credit score right now (it's already 700+).
5) I only intend to use the 401k as a loan if I am in a bind.

Seeing as how you're defending the idea, it seems like you've made up your mind. Regarding #5 - Personally, I wouldn't use my 401k as a loan unless it was a matter of life or death, as in I've already sold my house and nearly all of my belongings, and I'm about to live on the street.

I would never think about attempting this. You make $90k, your student loans are paid off, and you can't save more than 5% of your salary for retirement? Do you live in SoCal? What's happening with the money you used to pay towards your student loans?

 

[Capt Caveman]

I guess he wants to retire before he hits 65.

Mai72 talks a big game but is nothing but a hypocrite. Only a few years ago, he was teaching ESL in Thailand. Demonstrates that he reads a lot but has nothing to show for it.