Re: Making sense of paying of CC debt with a 401k (like) distribution
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Financial Planning - Financial planning in general. (Moderated) 

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Re: Making sense of paying of CC debt with a 401k (like) distribution Noemail 03-01-2008
Posted by on March 1, 2008, 1:01 pm
wrote:

>joetaxpayer wrote:
>> (per Tad's note, be sure this doesn't have other tax issues or features,
>> that it's a pure rollover to the IRA)
>
>Yeah the best thing to do may be to NOT rollover the assets to an IRA,
>instead taking the distribution and paying the 10% penalty. For example,
>if that amounts to a very tiny amount. In which case this becomes a
>different question entirely..."I have 90k of stock with big gains and
>credit card debt, what should I do?"
>

Why would that be a better deal than sheltering the distribution and
taking the tax hit?

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Posted by Tad Borek on March 3, 2008, 2:18 pm
Noemail@blank.com wrote:
>> Yeah the best thing to do may be to NOT rollover the assets to an IRA,
>> instead taking the distribution and paying the 10% penalty.
>
> Why would that be a better deal than sheltering the distribution and
> taking the tax hit?


I lost track of what you're doing but I think I have it now...you'd
rollover 10% of your ESOP to an IRA, then take an early distribution
from the IRA of an amount adequate to pay off the credit cards?

Forget that whole thing for a moment...there are some special tax rules
on ESOP stock that you can use when you (eventually) take a full
distribution, either at retirement or when you leave the job. You can
rollover to an IRA then, but it might not be the best move. The reason
is that taxes and penalties are based on the cost basis in your ESOP
stock, not the value at time of distribution. If your stock has very low
cost basis, you might want to make use of these rules when you leave the
company. So taking money out now could, in the long run, be a waste of a
big tax benefit that you're sitting on.

One comment on your basic question...if you have $900k in a 401k (or is
this all ESOP?) and are running up credit card debt, it's worth
revisiting your 401k contribution rate. There is a such thing as saving
too much for retirement. But that's a "going-forward" issue...you
typically end up paying so much tax on early 401k/IRA distributions that
they're an expensive source of cash. A cheaper solution may be to halt
all 401k contributions and pay off the debt. And of course, if you're
overspending your income, cut back on that.

-Tad

PS for info on ESOP tax rules google NET UNREALIZED APPRECIATION

--------------------------------------
Misc.invest.financial-plan is a moderated newsgroup where Moderators strive
to keep the conversations on-topic for financial planning. Other posting
guidelines include a request for brevity and another for trimming posts to
which we respond. For all of the other tips and suggestions, see "FROM THE
MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the
Newsgroup.


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