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Dave Says Don't be Dumb
Townhall.com ^ | November 27, 2012 | Dave Ramsey

Posted on 11/27/2012 6:24:06 AM PST by Kaslin

Dear Dave,

Is it a good idea for a married couple in their early thirties, who have a lot of student loan debt, to cash out one of their 401(k)s to pay it off?

Marcy

Dear Marcy,

No way! You never cash out a 401(k) or IRA to pay off debt, unless it’s to avoid a foreclosure or bankruptcy. Let’s say you take $50,000 out of your 401(k). Do you know what happens next? They’re going to charge you a 10 percent penalty, plus your tax rate. If you make $75,000 a year, that puts you in a 25 percent tax rate, plus the penalty. That’s a 35 percent hit, and that’s how much of your money is going straight down the toilet.

Look at it this way. You wouldn’t ask me if it’s okay to borrow money at a 35 percent interest rate to pay off your school loans, right? That would be ridiculous, and this is just as dumb.

There are no shortcuts when it comes to getting out of debt, Marcy. Roll up your sleeves and get on a beans and rice budget where every dollar has a name. This will enable you to save money and pay off that debt!

—Dave

Dear Dave,

My wife and I have our fully funded emergency fund in place, and we’re debt-free, except for the house. She wants to return to school to get a master’s degree and change careers. She’ll be reimbursed up to $7,000 a year. Can we use some of our emergency fund to get things started?

Kevin

Dear Kevin,

I’ve got a better idea. Save up the money!

You guys are in great shape already. And to me, this opportunity seems like a small investment with a fabulous return. I really like the idea. But you have to be careful when it comes to things like this. You don’t want to get into the habit of calling things emergencies when they’re not emergencies. It’s a great thing, but it’s nowhere near an emergency.

I know she’s excited about the possibilities, but I’d just roll up my sleeves, save a little extra for a while and cash flow the classes. She’ll probably get reimbursed for the first classes right after she gets her grades, then you can use the reimbursement check to pay for the next classes, and the next check the next classes. Make sense?

I love the school idea, and I’m glad your wife has such a great opportunity. But I don’t want you to take a chance on messing up the progress you’ve made in taking control of your finances. Just take your time and save for those first classes. You’ll be glad you did!

—Dave


TOPICS: Business/Economy
KEYWORDS:

1 posted on 11/27/2012 6:24:10 AM PST by Kaslin
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To: Kaslin
Some of it depends on age at the time. Returning to school in your later years is easier the younger you are. Delaying a year or two while you save some sheckels may simply increase your odds of not being able to complete the program of study while you're still able to do work in that field.

However, 401(k) accounts frequently have a LOAN mechanism ~ the federal government's equivalent called a Thrift Savings Account does.

You have to pay the money back ~ but during a time of low dividends, stagnant market, and low interest, it might be worthwhile to borrow from your own account ~ because your payback is going to be made at a higher rate of interest than the marketplace can command.

The consequence will be to have short term use of a larger sum of money than you thought you might get (since you are setting the terms of the loan payback period), and you will be forced over the long haul to put in more money to pay off the loan than you could have earned if you'd left it there!

Worked correctly, if you usually save at the maximum rate, borrowing from your account is a neat way to stick more money into your account than the rules otherwise allow!

2 posted on 11/27/2012 6:32:46 AM PST by muawiyah
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To: Kaslin

What does Dave say about the Government coming after 401K and IRA accounts to fund Obama’s National Retirement System? You bet I am cashing out penalty or not!


3 posted on 11/27/2012 6:33:16 AM PST by dpetty121263
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To: dpetty121263; Liz; stephenjohnbanker; SierraWasp; BOBTHENAILER; tubebender

“What does Dave say about the Government coming after 401K and IRA accounts to fund Obama’s National Retirement System? You bet I am cashing out penalty or not!”

Dave’s advice was right on target up to the above dangers re a national retirement system.

We got this advice years ago from our accountant, and she was right then and up to now.

However, if the Obozo Thugs/Pelosi/Reid convert our IRAs and 401ks to a national retirements system and pay us based on “need determined by them”. It might best to cash out IRA’s to pay off mortgages.


4 posted on 11/27/2012 6:40:50 AM PST by Grampa Dave (Tagline space for rent to pay for some of my extra taxes the next 4 years!)
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To: dpetty121263; Grampa Dave

If I’m not mistaken, doesn’t the penalty go up to 20% come January 1, 2013?


5 posted on 11/27/2012 7:22:15 AM PST by beaversmom
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To: beaversmom

“If I’m not mistaken, doesn’t the penalty go up to 20% come January 1, 2013?”

Since my trophy bride and I are in our 70’s, I haven’t paid attention to the penalty aspects.

We have the opposite problem. In October, I receive a letter from Fido re our IRAS, informing us that we needed to increase our withdrawals even though we used their formula in January for monthly withdrawals.

So the good news, this year, we made money on our IRAs and our balances were/are ahead of last year inspite of fairly heavy monthly withdrawals to reach our minimum yearly withdrawals.

The bad news is, we need to withdraw more to avoid a penalty for not meeting the minimum yearly withdrawal which kicks in during your 70th year.

Of course every withdrawal is subject to federal and Californicator income taxes.


6 posted on 11/27/2012 8:16:10 AM PST by Grampa Dave (Tagline space for rent to pay for some of my extra taxes the next 4 years!)
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To: Grampa Dave; dpetty121263
I haven’t paid attention to the penalty aspects.

I may be wrong about it. I did a google search and couldn't find anything about the penalty increasing to 20%, but both my husband and I could have sworn we read that in relation to Obamacare. Maybe it was just a proposal. I don't know. Don't want to put false info out there.

Of course every withdrawal is subject to federal and Californicator income taxes.

Oh boy, they get you coming or going, don't they? Sometimes both!

7 posted on 11/27/2012 8:22:59 AM PST by beaversmom
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To: muawiyah

If you lose your job, you may be required to pay back the entire 401(k) loan at the time of termination, or pay taxes and penalties on the money. It seems a little risky if being done for other than critical needs.


8 posted on 11/27/2012 8:51:04 AM PST by NEMDF
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To: Grampa Dave
Well, what does one expect from a government run mostly by the nations bastards of which there are more now that ever before!!!

(See new tagline, today)

9 posted on 11/27/2012 11:25:41 AM PST by SierraWasp (Blessed are they who prospect, dig & drill, for they are the primary producers of new, real wealth!!)
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To: NEMDF

Depends on the lending provisions. The government employee Thrift Plan loans have a fixed schedule with fixed payments ~ and I don’t recall any sudden death provision in them.


10 posted on 11/27/2012 11:42:16 AM PST by muawiyah
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To: Grampa Dave
Oh! I thought this thread was about YOUR advice!!!

I have a very low opinion of Dave Ramsey, Suzie Orman and even the one time unbelieveably lucky Bob Brinker. These are entertainers, NOT duly licensed and registered reps of legitimate investment firms on Wall Street!!!

There is virtually NO regulatory control nor any recourse should they ever give anyone a bum steer!!! When it gets right down to it, they are no more legitimate than Bernie Madeoff IMO. When Susie Orman mislead a bunch of followers, she had nothing to say to Oprah but "that's tragic" and just left it at that with nothing more said or done about it.

Ask ANY duly licensed Registered Representative of ANY brokerage firm what would happen if ANY of them ever behaved like that, even once. The only governmental control on the entertainers named above is via the FCC that only gets upset about "dirty words!"

I even put a lot more stock in Grampa Dave's expertise than in the three named above... REALLY!!!

(now I'm going to shut down till the flack from the unwise disciples tapers off a little - remember, this is just MY opinion for whatever that's worth since I surrendered my Series 65 license when Bernie Madeoff hit the headlines just out of embarrassment for that industry and that carreer)

11 posted on 11/27/2012 11:48:44 AM PST by SierraWasp (Blessed are they who prospect, dig & drill, for they are the primary producers of new, real wealth!!)
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To: muawiyah

Leaving Federal Service
When you leave Federal service, you must repay your loan in full within 90 days after your separation is reported to the TSP. Your repayment must include any accrued interest on the outstanding principal balance.


12 posted on 11/27/2012 12:13:34 PM PST by NEMDF
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To: muawiyah

https://www.tsp.gov/planparticipation/loans/nonPayStatus.shtml

Source of info re the loan repayment within 90 days.


13 posted on 11/27/2012 12:14:45 PM PST by NEMDF
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To: SierraWasp

“I have a very low opinion of Dave Ramsey, Suzie Orman and even the one time unbelieveably lucky Bob Brinker. These are entertainers, NOT duly licensed and registered reps of legitimate investment firms on Wall Street!!! “

You know how I feel about Brinker when he outed himself and defended Clintoon and was in Gore’s pocket and later Kerry.

Suz is beyond Brinker. My wife had thought she was fairly good until I said imagine she is a man instead of what she is re her advise. Then, I showed her what her advice would have done to our portfolios.

We are now finding out that the Whoreacle of Omaha, who wants higher taxes is well sheltered re how he has rigged his funds.

Fox Business last week had a lefty richie billonaire on and he wanted higher taxes. However, when confronted by the two Fox hosts, re he could give more tax money at anytime, he refused to commit to higher taxes. His concept of taxes is the same as all liberals, “I want all of you to pay more, and I will keep my billions sheltered.”


14 posted on 11/27/2012 1:16:11 PM PST by Grampa Dave (Tagline space for rent to pay for some of my extra taxes the next 4 years!)
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To: Kaslin; CSM

Pinging and Freeping like no one else so that later we can PING and FREEP like no one else.

Dave Ramsey ping!


15 posted on 11/28/2012 6:41:36 AM PST by Altariel ("Curse your sudden but inevitable betrayal!")
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To: Hoosier Catholic Momma; CottonBall; TenthAmendmentChampion; Chickensoup; JDoutrider; ...

17 days and counting till BS #6 completed!

Dave Ramsey ping.


16 posted on 11/28/2012 7:24:21 AM PST by CSM (Keeper of the Dave Ramsey Ping list. FReepmail me if you want your beeber stuned.)
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To: Hoosier Catholic Momma; CottonBall; TenthAmendmentChampion; Chickensoup; JDoutrider; ...

17 days and counting till BS #6 completed!

Dave Ramsey ping.


17 posted on 11/28/2012 7:24:47 AM PST by CSM (Keeper of the Dave Ramsey Ping list. FReepmail me if you want your beeber stuned.)
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To: CSM

Congrats. I did BS#6 just yesterday. I’ve been hoarding cash for 4 years now, afraid to add more to market, although we’ve kept everything we had there . . . but didn’t want to add more as we are back from ‘08 . . . husband kept bugging me to pay a big chunk on house and some on land . . . and I kept resisting, hated to let go of my stash of cash . . . did it yesterday, wired the money from the payoff statement from the credit union so instantaneous so as of today we own it. No car payment. A very small land payment but I think we’ll put that up for sale this spring when things green up as I don’t see us ever building there now as we still have 2 1/2 years to maintain state residency for son to go to college here . . . daughter already there.

It is a great feeling. The 17 days will fly by.


18 posted on 11/28/2012 8:58:14 AM PST by Qwackertoo (Going into Politic Free Zone Momma Grizzly hibernation for a while after this week, maybe forever.)
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To: CSM

So close! :-D


19 posted on 11/28/2012 12:35:59 PM PST by Altariel ("Curse your sudden but inevitable betrayal!")
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To: Qwackertoo

I started BS#1 and 2 in March of 2006, and it has all flown by. However, every day right now is dragging and dragging!

Congrats to you on getting there! I have a feeling we will be very happy that we have minimized all of our expenses...


20 posted on 11/28/2012 1:10:55 PM PST by CSM (Keeper of the Dave Ramsey Ping list. FReepmail me if you want your beeber stuned.)
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To: Altariel

Haha, I just realized that I made my “17 day declaration” on post number 17! It must be meant to be!


21 posted on 11/28/2012 1:14:17 PM PST by CSM (Keeper of the Dave Ramsey Ping list. FReepmail me if you want your beeber stuned.)
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To: CSM

Good for you!!! How awesome is that!!!!


22 posted on 11/29/2012 8:46:45 AM PST by BallparkBoys (RESIST WE MUCH! ....We must, and we will much, about that, be committed!)
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