05 Feb I lost my job. Should I pay off my debt?
Q. I’m 62 and I was recently laid off from my $150,000 job. I’ve been looking for work for four months. I have $190,000 in my IRA, $92,000 in a 401(k), $125,000 in stocks and $125,000 in cash. I also have a $90,000 mortgage and $45,000 in car loans and credit card debt. My wife gets $2,400 a month from Social Security and a $1,600 per month pension. If I can’t get a job in the next four or five months, should I take some of the 401(k) money to pay off the debt? If I file for Social Security I’d get $2,400 per month rather than $3,100 in four years. What should I do?
A. To make the right decision, there’s a lot more to consider than your assets and your debt.
The real question is whether you can afford to retire today and still maintain your standard of living.
That means examining your expenses today and what you think your expenses will be in retirement, said Steven Gallo, a certified public accountant and personal financial specialist with U.S. Financial Services in Fairfield.
Plus, before making any decisions about paying off debt, you’d need to look at the interest rates and time remaining on each debt, he said.
For example, if you have a 0% or 1.9% car loan, it probably does not make sense to pay it off early, he said.
To address your question about taking money from your 401(k) to pay off your car and credit card debt, based on the limited information provided, Gallo said his answer would be no.
“Taking a distribution from your 401(k) to pay these debts would be a taxable transaction,” he said. “Therefore, you would have to take significantly more then the $45,000 out of your 401(k) plan to pay the debt and the corresponding taxes resulting from the distribution.”
He said if it was determined that you should pay off the loans, he would recommend using non-qualified assets such as cash or stocks.
“By using these funds, you should be able to avoid any significant tax consequences,” he said.
Good luck on the job hunt!
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This story was originally published on Feb. 5, 2020.
NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.