should I sacrifice 401k to finance 2 ac units? (paying, charge, income)

[duster1979]

You're correct, the interest does go back to the account. I was thinking of the fees which are sometimes greater than the interest.

Keep in mind that your repayment deductions will be post-tax, so if you replace part of your contribution with the repayment your paycheck will be a little smaller.

I still recommend pulling your IRA contributions first, it's cleaner all the way around and costs absolutely nothing, provided it's a Roth that is.

[Mr. GE]

Originally Posted by Mr. GE

It's not "exactly" immediate.... its 60-90 days.

Most companies will only let you borrow up to 50% of the 401k anyway. So even if you change jobs, you will probably owe less than what your full balance is and that amount would be deducted from balance.

For example:
You have $10K in your 401k and you borrow $5K. Then you change jobs after a year (which you have paid $500 back).

You can either pay back the remaining $4500 in 60-90 days and have $10K to cash out or transfer to another retirement account. Or you can have the loan balance ($4500) deducted from your 401k balance ($10K) which results in $5500 to either cash out or transfer to another retirement account.

If you cash out at that point... the $5500 will be taxed 20% immediately ($1100 in this case) and you will get a check for $4400. But then that $4400 will be subject to a 10% penality ($440) and federal and state (if applicable) income taxes for the year. So if you are in the 25% tax bracket then you are looking at another ($1100) off that $4400.

So you net only $2860 out of that original $5500... That's only 52% of your money!!!

This is why they say only cash out if it is an absolute necessity. If you transfer it to another retirement account or leave it in the 401k, and then withdraw that same $5500 at retirement. It is only subject to income tax (25% from my example) which result in a net amount of $4125, almost 45% more than than when you took it out early.

In my example, I only use $10K... if you have more money the amount lost is much more because it is based on a percentage. If you don't have much money in the 401k it may be worth it if you really need the money but if you have anything over $10K you are probably making a mistake by cashing out.

There is one correction I need to make in my example above...

The income tax & tax penalty is based on the full withdrawn amount of $5500. This is before the initial 20% tax and not the amount after ($4400 in my example). So the 25% income tax amount should be $1375 which is 25% of $5500. In addition the 10% penalty will be based on the $5500. So if we re-calculate the income tax and penalty after the correction....

$5500 withdrawn
-$1100 20% initial tax
-$1375 25% total income tax
-$550 10% tax penalty
______
$2475 Net Amount... that is equal to 45% of the amount withdrawn!

Now of course your tax braket might only be 20% or 15% but you still get the point. bottomline is you are getting around 45 to 55 cents on the dollar by cashing out. Just not a good number in any circumstances.

[md21722]

Mr. GE,

I don't think you have it right? The "20% initial tax" is withholding. If your "marginal tax bracket" is 25%, then the total tax on this money is 35% (25% marginal tax rate + 10% penalty tax) meaning you would end up with $3,575 of the $5,000. We're leaving AZ state income tax out here, but the rates are pretty low 4.5% is roughly the highest rate ($247.50)

So if the OP wants to withdrawal $5500, the 401k provider would withhold 20% and cut him a check $4400. When the OP does their taxes at the end of the year they would end up computing the final tax. I'm not sure when the 10% penalty tax is paid - if it is withheld at the time of withdrawal or if it paid when the 1040 is due which would also affect the check he gets depending on how they do it.

[md21722]

Since 401k contributions were never taxed to begin with, its just a chunk to pay at withdrawal time. The 10% penalty tax plus lost earnings are the true cost of making the withdrawal. If you can take out a personal loan at 7.25-10% and pay it back in a year then its effectively cheaper to borrow the money. If you can't pay it back anytime soon, I would do the withdrawal.

[bradykp]

Originally Posted by greendesert

First, we live in Arizona - so no, we cannot live without AC.
We have 2 very old AC units (as old as the house 1984) and a newer one. Yes it was a very bad idea to buy this house in 2008.
We are working hard to pay off a bunch of credit card debt, we have about 2.5 more years to go I think. And my school loan is taking forever. We have no savings. I have been diagnosed with Hepatitis C about a year ago but work fulltime to provide for the family. (I probably have cirrhosis, hopefully not liver cancer, waiting for results now) Wife homeschools kids and works part time. Money is super tight, we don't even have health insurance for wife and kids (mine is paid for by my job, adding them to the policy cost $900/month so that didn't last long).
The two older units are pretty much toast. One needs a compressor for sure, the other, the compressor works sometimes. I could have the compressors replaced, but they will continue to break and they're very inefficient.
Anyway you get the picture, we're SCREWED.
I have an IRA and a 401k, with maybe 20K in it altogether. (depending on how much more the market crashes tomorrow). I'm thinking of borrowing from the 401k or possibly liquidating the IRA in order to pay for this. I know it's a bad idea, but another loan (we're already in deep debt) is probably a worse idea.
Any input would be appreciated.

Does your state have any special programs to upgrade your old units to efficient units? NJ has a program where you can get a 10 year, 0% loan for $10,000 if you achieve certain gains.

And i know it would suck, but you can actually survive without a/c, believe it or not.

[bradykp]

Originally Posted by golfgal

If you are going to liquidate accounts, pay off the debt with that money. Look into private plans for your wife and kids so you don't end up in MORE debt because of medical bills. Put your kids in school and have your wife work full time until you catch up. Get some window AC units to hold you over (which will cost under $1000-for 3 or so units) until you can fix the compressors. No, not the best idea to liquidate your retirement accounts but in the long run, if you are careful and dedicated to replacing that money, you will be fine down the road.

i forgot about window a/c units. i think this is the best solution for temporary, and you can always sell them to someone when you're done with them and can afford to fix the a/c units.

[greendesert]

>> but you can actually survive without a/c, believe it or not.
haha. yeah, I invite you to survive the summer in Phoenix without AC. We had over 80 days last summer with temperatures OVER 110. aha, yeah. Good luck getting your kids to do homework with those temperatures. Things are not like they used to be where people could take it easy and take a siesta all day. These temperature swings are very hard on my body and like I mentioned, I'm fighting for my life.

[md21722]

Have you considered of moving into a rental home and renting out your home? I'm not sure if you can rent and save money, but it is something to look at... as a rental, in addition to mortgage interest, you can also deduct utilities, maintenance/repairs, insurance, depreciation, ... you can also rent out a portion of your home as someone else said. And, the deductions start when the home/part of the home is "placed in service" meaning listed as available for rent, not when you actually sign a lease.

[Gemdiver]

Originally Posted by bradykp

i forgot about window a/c units. i think this is the best solution for temporary, and you can always sell them to someone when you're done with them and can afford to fix the a/c units.

Pretty much this and get an extra job to pay for the repairs to your a/c units.

[haggardhouseelf]

I see window unit A/C's all the time on Craigslist, sometimes given away from free, people just want them gone. I even gave two away on Craigslist two years ago when we bought quieter ones.

Being from Texas, and having almost always lived in old houses without A/C because we were always poor, I totally understand your situation. But, It doesn't seem like taking money out of your 401(K) is going to help your situation. You will simply dig yourself into a deeper hole.

I would recommend talking to a financial advisor at your credit union or see if your bank offers that sort of service. We use a credit union because they do offer those kinds of services, but perhaps banks do, too, I dunno. But a professional financial advisor/certified financial planner can be of tremendous help here. He or she might be able to pull some tricks out of a hat for you, ours often has with us.

What are the reasons for homeschooling? We've homeschooled in the past as well, so I understand how in some situations you might feel you have no other option. If not, considering your financial situation, it might be time to put the kids in school so your wife can work and help pay down the debt and help relieve some of your burden of providing financially for the family. Especially considering your medical/health situation. If something happens to you, she's up a creak. If she's working and earning more, at least she has a boat... and the kids, too.

If you can find someone who knows how to repair old A/C units, perhaps you could work out a barter/trade?