Jewish World Review Jan. 11, 2001 / 16 Teves, 5761
Credit cards and 401Ks
DEAR BRUCE: I am finally making some decent income, after having struggled for many years as I worked my way up the corporate ladder. Along the way, we used our credit cards to keep our family afloat. I have four major creditors, now that I owe $20,000 to. I am earning $65,000 a year, and in addition, I have a small enterprise, which gives me $15,000 a year. I will also receive a $12,000 bonus shortly, which will give me about $7,500 after taxes. How would you suggest I go about attacking my debt? -- J.B., via e-mail
DEAR J.B.: Given the credit card debt is ordinarily a very expensive way to borrow money, I would attack it right from the front. That means that I would take the $7,500 and use it to lop off the debt. In addition, if you took your part-time income of $15,000 and used it for debt reduction, you would be out of the woods in a year and would not have used any of your money from your regular salary. Of course, if you could retire it more quickly by using money from that source, you would be better off. You have the resources. All it takes now is the discipline. Get to it!
DEAR BRUCE: I owe $10,000 on my credit card. The payment is a minimum of $200 a month, of which half goes to interest. I will never get out this way. My question is, I have a CD and am thinking of withdrawing $10,000 from it to pay off the credit card debt. I hate to do this, since I am putting the money away for my retirement. I am 59 years old and will need all of the money that I can get. I am in a dilemma. -- J.H., via e-mail
DEAR J.H.: The likelihood is that the CD is not paying anything like the interest that you are
forking over to the credit card company. I would withdraw the money as you have outlined.
Ordinarily I would never counsel someone to do this. But at your age, retirement is not that far away. It seems pointless for you to be paying $1,200 a year in interest. Your CDs are not generating that kind of dough. The likelihood is that your CD's are accruing earnings for you at about half the rate that you are being charged on the credit card. Plus, before you get the money from the CD, you will have to pay taxes.
I think that under these conditions, I would use the CD money.
DEAR BRUCE: I am 25 and currently making $50,000 as a programmer. I am thinking about leaving my company in six to eight months, when their projects are completed. I will have $25,000 in my 401(k).
What should I do with it? I could leave it where it is, or transfer it to a new company. Is there any way that I could transfer it into a Roth IRA account or into a regular IRA? -- M.H., Napa, Idaho
DEAR M.H.: It would depend in some measure on how the plan has been constructed. On balance the likelihood is that you can leave it where it is, and if it's doing well, why not, or transfer it to a traditional IRA. That way you would call the shots. As to the Roth IRA, the good news is, yes, you could transfer it, but the bad news is that you will have to pay all of the taxes that would be due on $25,000 and, given your current income, I suspect that would be rather substantial. You will have to run the numbers and see which would be to your advantage. Take into account your actual tax situation now and what it will be in the next two to three years, and see which will work for you. If you could take the hit now, you would have 40 years of totally tax-free earnings on that $25,000. In other words, if you can pay the taxes from some other source, I think it would be a good
Send your questions to JWR contributor Bruce Williams by clicking here. (Questions of general interest will be answered in future columns. Owing to the volume of mail, personal replies cannot be provided.) Interested in buying or selling a house? Let Bruce Williams' "House Smart" be your guide. (Sales of the book help fund JWR).
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