EF question

**Telephus44** · 07-23-2010, 06:10 PM

DH is starting a new job in 3 weeks. We have a $3000 outstanding loan on his 401K. I have $3500 sitting in ING as our EF. Would you take the $$ out and pay off the loan? DH's new job will net us an extra $2000 take home per month.

My first priority with the extra $$ would be to get the EF up to $5000 (2-1/2 months).

My other option would be to take the hit at tax time.

**lparker** · 07-23-2010, 07:08 PM

With the rash of people being told they have a job and then they don't...I'd keep the EF money where it is and pay off the loan after he earns the money...I believe you are paying yourself as you pay on the 401K loan anyway.

**mek42** · 07-24-2010, 05:03 PM

Originally Posted by lparker

With the rash of people being told they have a job and then they don't...I'd keep the EF money where it is and pay off the loan after he earns the money...I believe you are paying yourself as you pay on the 401K loan anyway.

The problem is that there is a fairly large penalty associated with not repaying a 401(k) loan within (I think) 90 days upon the job being terminated.

What amount of penalty and tax liability are you looking at?

Maybe draw the existing EF down to $1,000 to pay most of the 401(k) loan and then pay it off ASAP with new earned income. If you are willing to be taxed on the 401(k) balance, roll it over into a Roth IRA - however much you want to keep liquid put into a money market mutual fund and then distribute the rest like any other Roth IRA balance. You can withdraw principal from a Roth IRA at any time without penalty. I don't know if employer matching is considered principal at time of rollover. I also don't know if you can roll some to Roth, some to traditional IRA to continue to defer taxes.

Roth or traditional also depends on how old you are.

Other than this loan and a primary mortgage are you debt-free?

**Saule** · 07-24-2010, 07:45 PM

I would check to see when you have to repay the 401k plan loan to avoid the penalty, pay it off before then, but see if you can avoid taking money out of savings, esp as there will be more income with the new job. I had to take a loan from my 401k for a family emergency, and it ended being my best investment because of the way the market changed. Since iit all goes back to you, it's not bad interest the way that CC are, but the job change and need to finish paying it off is the only kicker.

**Greebo** · 07-25-2010, 04:31 AM

What's the deadline on that loan payment?

I don't like the risk of draining your EF, but I like that 10% penalty on top of taxes even less. I think I'd go with paying it off, IF you're confident that his new job is going to come through.

**Telephus44** · 07-25-2010, 09:32 PM

Well, he had been promised it since the middle of June, but I waited until I saw the signed offer letter and new hire packet arrive last Friday to actually really think about it.

We have two car loans, totalling $10K. One small balance on a CC ($2K). For the most part, I'm not a Dave Ramsey kind of person who believes in paying off debt as fast as possible. We currently put 12% of our income towards retirement, also we invest another $300 in DRIP's and my son's 529 plan. I pay a little extra on the mortgage. I was originally planning on paying the cars and CC off by 2012, but now it looks like I might knock them out by early next year. The car loans are at 5.5% and the CC is at 2.9%, so none of it is high interest. We also put aside $150 per pay period (we both get paid every two weeks) into our ING EF.

I do have a Roth IRA that I max out every year, although this year my employer starting offering a Roth 401K. DH's new job will also push us over the limit for a Roth (our new combined income will be about $170K). I plan on maxing out my Roth for 2010, and then since I won't be eligible, just maxing out my Roth 401K. After paying off this loan, we plan on leaving this 401K alone. DH is happy with the fund choices, and his new job won't come with a 401K.

I have not checked to confirm, but I believe that we have 60 days after his job ends to pay off the loan. I believe it's up to the company, but places I've worked its been anywhere from 30 to 90 days. I have a couple other large bills I'm juggling (quarterly/annually/semi-annual stuff, mainly car and home-owners insurance) so I know I won't be able to pay off a 401K loan without wiping out the savings account.

**khaski** · 07-26-2010, 08:06 AM

I would for sure wait until those new paychecks start rolling in, pay it out of that, I wouldn't wipe out my EF for it...you never know what can happen, keep it safe to keep you from accruing more debt if something comes up once the $ is gone.

**Russ** · 07-26-2010, 02:33 PM

If you're going to be making $2000 more per month, you can easily pay off that loan in 2 months.

**Greebo** · 07-26-2010, 02:37 PM

Since you're looking at taxes AND a 10% penalty, I say pay it off now, take no chances.

Don't get the IRS up in your grill.

**Russ** · 07-26-2010, 02:47 PM

IMO... You should be paying off the CC's and cars before paying extra towards the mortgage. Why have the CC debt if you don't need to?

**Telephus44** · 07-26-2010, 03:17 PM

Because I pay anywhere between $7 and $9 a month in interest on the credit card - I pay extra on the mortgage so I can get to 80% LTV and get rid of PMI. I pay $100 plus the interest each month on the card. So in 20 months, I'll have paid about $180 in interest. I could take the extra $120 I pay on the mortgage and pay the credit card off in 9 months and save myself $81 in interest, but I'll pay a lot more in PMI and interest on the mortgage over the long term.

Once I have the extra $2K per month coming in, I do plan on getting rid of the CC. It's the last holdover from when DH was handling the checkbook, and he for some reason chose to pay the car insurance in full in one lump sum instead of paying off this bill when it was incurred.

**Russ** · 07-26-2010, 03:21 PM

ahhh, that makes sense.

**nodmicks** · 07-26-2010, 04:12 PM

Do you have 30 , 60 or 90 days to pay the 401 off in full without penalty? That makes a difference (at least to me). If it is only 30 days I'd use the EF. If it is the 60 to 90 days I'd use the extra 2k per month if you are 100% sure you will pay it off on time.

**satarac7** · 08-15-2010, 12:13 PM

Originally Posted by Telephus44

Well, he had been promised it since the middle of June, but I waited until I saw the signed offer letter and new hire packet arrive last Friday to actually really think about it.

We have two car loans, totalling $10K. One small balance on a CC ($2K). For the most part, I'm not a Dave Ramsey kind of person who believes in paying off debt as fast as possible. We currently put 12% of our income towards retirement, also we invest another $300 in DRIP's and my son's 529 plan. I pay a little extra on the mortgage. I was originally planning on paying the cars and CC off by 2012, but now it looks like I might knock them out by early next year. The car loans are at 5.5% and the CC is at 2.9%, so none of it is high interest. We also put aside $150 per pay period (we both get paid every two weeks) into our ING EF.

I do have a Roth IRA that I max out every year, although this year my employer starting offering a Roth 401K. DH's new job will also push us over the limit for a Roth (our new combined income will be about $170K). I plan on maxing out my Roth for 2010, and then since I won't be eligible, just maxing out my Roth 401K. After paying off this loan, we plan on leaving this 401K alone. DH is happy with the fund choices, and his new job won't come with a 401K.

I have not checked to confirm, but I believe that we have 60 days after his job ends to pay off the loan. I believe it's up to the company, but places I've worked its been anywhere from 30 to 90 days. I have a couple other large bills I'm juggling (quarterly/annually/semi-annual stuff, mainly car and home-owners insurance) so I know I won't be able to pay off a 401K loan without wiping out the savings account.

Telephus,

You seem to have your finances in order to a certain point. You are saving a good percentage of your money for retirement and your son's college fund. You have extra money going to the mortgage and little CC debt. The place I see a problem is your lack of any real emergency fund. If you are going to carry debt (not a Dave Ramsey fan) then you are one emergency away from trouble. With an income of 170k, you should have quite a nice cash account set aside for a rainy day. A 3k debt that needs to be paid should be a very minor setback, not something that wipes your savings. Juggling should not be needed with a combined income like yours.

**JessieMom** · 08-15-2010, 06:30 PM

I would find out for sure how long you have to pay off the loan after he leaves. I had a loan on my 401k and recently left my employer. I was under the impression that after I left I would need to pay the loan off pretty much immediately (30-60 day range) or take the hit with the penalty & taxes. After leaving I was notified by Fidelity (where the 401K is) that as long as I continued to make the payments monthly I would not need to pay in full or take the penalty. We decided to continue to make the payments back into the 401k instead of reducing our savings or paying the penalty & taxes on it.