Should I Tap 457B to get out of debt?


#1

I’m new here and need some help. Not sure if this is appropriate, but I’ve been out of full-time work for two years. I’ve set up a LLCc and am doing a few small consulting jobs but I am barely covering monthly bills. Barely. Considering tapping my 457B to cover about $80K of credit debt and credit union loans. I know there is a 20% fed tax hit and an 8% state hit, but I’m thinking that if I don’t do this now, I’m screwed particularly since my one contract is up in July and not certain anything else that pays as well will come through. I’ll still have about $500K in other 457 and 401 plans.

Is this worth doing? I’m 54 and have finally sworn off loans and debt. I looked into the credit consolidation, but that seems risky and I’m not sure I like the idea of handing my debt responsibility off to strangers. Cant afford a tax or investment consultant so your feedback is vital.


#2

Hey @DRob5182. Off the top of my head since I don’t have more specific details as to your situation and where you’re at with your planning, I’m a firm believer in not taking any money out of retirement accounts prematurely. The first thing is to analyze why you got into the $80K of CC and loan debt in the first place. My concern is if you haven’t changed anything that got you into this debt in the first place, I’m afraid it will continue after paying it off with your retirement account money and later would have to tap into your retirement accounts again. So first have to see if you’ve changed up your lifestyle and started to cut expenses and down size on what you need to live on. A lot of sacrifice would have to be in that area.

The next is can you use that extra money to start paying off on the debt. Are there any other streams of income you can use your consulting skills to tap into to generate extra income? If you have exhausted all ways to see if you can stop the spending and also increase creating other streams of income and can start to pay down the debt, the next step is to see which ones are the better ones to tackle first.

If you’ve already done all of this and feel like you absolutely need to tap into your retirement account, you would need at least $112K to end up with the $80K needed after the tax hit and also not sure about any penalties for early withdrawal from that account if any. If I’m faced with this decision I would still look at my potential for earning more in the future and if I really needed to do this how much do I really need to take out of the account and how much should I really pay down and can I keep investing the extra money I would have been using to pay the debt into recovering my retirement investments according to the goals and plans I had set for investing and retirement. At your age and considering health and lifestyle, regardless of which direction you go, can you still get to your investing and retirement goals. So run those numbers as best you can. I dont know if anyone else has any more detailed experiences to say one way or the other on the early withdrawal from the investing accounts, but I think either way depends on running those numbers and seeing how you can project getting back on track and how long that could take. Not sure if I helped any or told you stuff you dont already know, but sometimes just helps to talk it out till you can make the decision and stick with the plan to get you back to where you want to be. I don’t think you’re in a bad situation, but whichever path you finally choose, I think you’ll be ok to work and invest and be able to reach your financial goals.


#3

Any one else have any specific experience with this situation for @DRob5182???


#4

Thanks for the thoughtful response. Obviously it took a while to get here and its taken a while to analyse the situation. I’ve pared down to pretty spartan existence and have stopped using cards. There is also the spectre of my beloved leaving if I don’t get it together. My plan was to pay everything off and resume investing in my kids CSP (she has one more year to go!). I’ll also resume heavy investment in my IRA. I had a ShareBuilder stock account but used most of that for kids tuition. May repopen similar account to get back in the market. I figure with my 10-15-year horizon I should be able to recoup most of the loss and with careful budgeting may even be able to do a little traveling in a few years.


#5

It’s a bad idea to use tap your retirement savings early while funding your kid’s college education. She can get a loan to get through that final year, but you can’t get a loan for retirement. This is very much a “secure your own mask before helping others” situation. And it helps your daughter in the long run: if she doesn’t have to take care of you in your old age because you planned well, that’s much better for her. (As say this as someone who has both student loans and is probably going to have to help either my parents, or my husband’s parents, or both sets of parents in the future. The student loans are easier to deal with.)

I strongly suggest you consider prioritizing your retirement (including not taking out of it) before a kid’s education.


#6

I see truth in @stephonee’s advice. I’m not a debt expert, but I have some skills at life. At all times, we have to make sure we are happy and healthy on the inside, before we can really help other people. It is not a selfish act to put your personal and financial health first. Because once you’re financially healthy, you’ll be able to help the people around you 10X as much.


#7

I agree with @stephonee and @WealthWellDone. Whether it’s your physical health or financial health, if you don’t take care of yourself first, you won’t be able to take care of those you love the way you’re capable of. You have to take care of yourself first and those who love you will understand and still be behind you.

Definitely exhaust other ways to handle paying down your other debt before touching your investments. Once I put money in my investment accounts and “savings” I try not to touch it at all and only plan on things with future money. I only use the credit cards to pay for bills and whatever else I can that I would normally use cash for and then use the cash to pay off my cards to get the rewards from the credit cards. I stay well within my budget and I never use my credit cards for any unnecessary spending. I know easier said than done, but can definitely be done.