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What Would You Say?

March 5th, 2014 at 08:55 am

What would you say to the following question? Should I rollover my old 401K, worth about $15,000, or should I pay off a current 401K loan with it? The interest rate is 2.25%.

Let's assume there are no other details provided, or feel free to make your own assumptions when you answer.
I will chime in later today with my answer. Oh, and this isn't about me or my family.

I wrote a post about our dental insurance on Our Money Blog yesterday. I have completed 4/20 workouts as of today!

5 Responses to “What Would You Say?”

  1. Kiki Says:

    if pre tax, don't you lose some from taxes? How much? How much is the loan? what is the pay off schedule on the loan? How does this impact your monthly budget? What is the earning power on the 401k money?

  2. Jenn Says:

    Do the rollover into an IRA. Don't get hit with the withdrawal penalty! It, with the taxes, is a heck of a lot more than 2.25%.

  3. MonkeyMama Says:

    Same as Jenn said.

    I'd say a 401k loan would be of the topmost priority to pay off (because it will trigger taxes and penalties if you leave your job with loan unpaid).

    But, I don't believe you can use an old 401k to pay off the loan, without triggering taxes and penalties. So, yeah, I'd vote for the rollover.

  4. Charles Rice Says:

    Assuming you have an income stream that can support payments on the loan:

    Pay off the debt with current income, not with retirement savings.
    The interest rate is low, so even if it takes a year to kill it and it is $10,000 in debt, you are probably going to pay less than $200 in interest for the entire year.

    Paying the loan off with retirement savings, or borrowing from retirement savings in the first place, is exactly the same thing as stealing from you future self. If you could go on a trip that would guarantee that in 5 years you would get sick and have to spend $5,000 in hospital bills? Of course not.

  5. creditcardfree Says:

    This was a question by my husband's coworker. And yes, I told him that taking the money out of the IRA would be taxable with a penalty in order to apply it to the loan. Definitely freaked when I mentioned the penalty. He will be rolling the money over to an IRA. We all did learn the interest on the loan is paid back into his account. He can afford the payments; they are automatically deducted from his paycheck. He just regrets taking out the loan to help get a second home which he is living in. College age kids live in his first home. I think he was looking for a quick fix, but alas, we know that isn't the case.

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