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-   -   Should I use 457 money to pay off debt? (http://www.early-retirement.org/forums/f28/should-i-use-457-money-to-pay-off-debt-51829.html)

ripper1 08-26-2010 08:49 PM

Should I use 457 money to pay off debt?
 
:greetings10:Have some short term debt to pay down. My pension provides enough day to day income but the debt of 830 a month for 20 more months may make things a bit tough. I have the cash to pay this debt but it is free money at 0%. I was thinking of withdrawing this amount monthly from 457 account. These withdrawals would fall just under 4% a year with 15% held back for taxes. Afterwards I could continue to enjoy the extra money by spending some and saving some. Or should I stop making withdrawals to let my 457 to continue to grow tax deferred?

ripper1 08-27-2010 04:47 PM

ripper1
 
Thanks Alan. I'm just feeling my way around this thing. I guess I will figure it out sooner or later.

LOL! 08-27-2010 06:04 PM

Not enough info. I guess that you are not working since you seem to be getting a pension currently. Are you getting Social Security? What's the interest rate on the debt? If you withdraw from the 457, you state it will be taxed at 15%? Really? Or will you go into a higher tax bracket?

Etc.

ripper1 08-28-2010 09:14 AM

ripper1
 
Thank you for your reply, LOL. Yes I am not working. I believe I stated the debt is interest free. I am in the 15% bracket so I am instructed the 457 people to withhold 15%. The pension is enough to sustain us without the added debt. I just do not want to cut my reserves in half as I may have to pay for a wedding down the road.

LOL! 08-28-2010 10:20 AM

A 0%-interest rate loan should not be paid off ahead of time.

So you are asking do you pay the debt from your cash-on-hand or do you withdraw from tax-deferred to pay it. In essence, you should use cash-on hand and keep deferring taxes on the 457. See the calculator at Optimal Retirement Calculator and Retirement Decision Support System

Since it appears you can withdraw your 457 at any time, you can consider it your reserve instead of the cash you are calling your reserve now.

You may also wish to consider some kind of conversion to a Roth for some of your deferred money. I don't know how 457 money is treated when you reach age 70.5, are there RMDs?

Alan 08-28-2010 11:40 AM

Quote:

Originally Posted by LOL! (Post 972796)
A 0%-interest rate loan should not be paid off ahead of time.

So you are asking do you pay the debt from your cash-on-hand or do you withdraw from tax-deferred to pay it. In essence, you should use cash-on hand and keep deferring taxes on the 457. See the calculator at Optimal Retirement Calculator and Retirement Decision Support System

Since it appears you can withdraw your 457 at any time, you can consider it your reserve instead of the cash you are calling your reserve now.

You may also wish to consider some kind of conversion to a Roth for some of your deferred money. I don't know how 457 money is treated when you reach age 70.5, are there RMDs?


I'm also not familiar with 457 plans, you'll need to do some checking but it looks like they are subject to RMD's at 70.5 years of age

Retirement Plans FAQs regarding Required Minimum Distributions


Quote:

What types of retirement plans require minimum distributions?

The RMD rules apply to all employer sponsored retirement plans, including
profit-sharing plans, 401(k) plans, 403(b) plans, and 457(b) plans. The RMD rules also apply to traditional IRAs and IRA-based plans such as SEPs, SARSEPs, and SIMPLE IRAs.

The RMD rules also apply to Roth 401(k) accounts. However, the RMD rules do not apply to Roth IRAs while the owner is alive.

ripper1 08-29-2010 12:30 PM

ripper1
 
To me a roth is a pay me now or pay me later. I think it is ploy by the government to get your money. I don't believe it creates wealth. For example say you have a stock or fund worth 1000 and you are in the 25% tax bracket. You pay the 250 and now you have 750. If it doubles in value 3 to 5 years or so down the road now you have 1500 tax free. If you kept the 1000 in the traditional fashion then you would have 2000. You pay the taxes and your back to 1500. So it is the same thing. It does not create wealth. Who is to say that the roth will not be taxed in the future in some fashion. Washington has a way of going back on their word. Some might say "yeah but in 5 years you are going to be in a higher tax bracket." But nobody knows what tax policy is going to be in 5 years. Everything is speculation. Sorry, I believe I got off the track a bit, I think I may be paying off the 0% debt as it comes due with my cash and consider my 457 down the road as needed. Thank, you, LOL.

LOL! 08-29-2010 12:52 PM

The deal with Roth conversions is that generally you should convert while you are in a low tax bracket like 10% to 15%, while if you didn't convert, your gains down the road would be taxed at 25%.

This is something that you can figure out. For example, do you get social security benefits? If you don't, then you need to consider that your taxes now are probably lower than they will be when you start SS benefits, so converting now may be beneficial.


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