72K in 401K. My job is in dire straights (I’m looking, but at 45 it may be a while).
I don’t want to lose my home. I have 1 credit card, but it’s substantial. I do NOT want to file bankruptcy. My plan may be to sell my car to pay the debt off, however, I don’t want to do that since I need it.

I need to:
A: resolve the CC debt in case I lose my job.
B: See if I can reduce my house payments.
C: Pay off what I owe on my car so I don’t have that payment (Owe $5,000.)

My thought was. Pay off the credit card embarrassed to say, but $18,000 at 8% – the interest rate isn’t bad… but my balance is HORRIFIC! The card saved me after I was unemployed for nearly a year…a couple of years ago after my company of 12 years let me go to hire a 22 yo. (It’s been rough.)
Pay off the car at $5,000.

Pay the taxes on the 72… which would be over $20,000? Leaving me with $50… sadly, which is what I owe. $49,000

How can I just REDUCE the CC, pay off the car. Pay the taxes… and SALVAGE SOME to roll into an IRA?

The new job finding is up to me. I don’t make that much…and especially won’t starting a new job. (33K)

Please don’t think I’m a fool for even touching the 401K….I’m not going to lose my house or go bankrupt when I have funds…but need to use them smartly.

My house is 6% fixed. Would it help if I used it to reduce my Principal.

I’ve exposed myself so please do not be harsh with me… I just need help right now… not criticism. Thank you.

At the instant of the conversion, that is correct, but consider a few years down the road. Say you start with a $60k 401k and $120k in savings.

Good Advice – Pay the $20k of tax out of regular savings:

Roth balance: $60k
Savings, remaining: $100k
Total of 2 accounts after conversion: $160k

Poor Advice – Pay the $20k out of the Roth:

Roth balance: $40k
Savings, remaining: $120k
Total of 2 accounts after conversion: $160k

Ct, that’s where you stop thinking about this. But, you need to put the thinking cap on and stay focused, because you are only correct at that moment, assuming no more money is going to be earned on either account.

Each year you would hopefully (present year excluded) have positive returns on your accounts. WIth the Roth, all these returns, cap gains and dividends, are TAX FREE. Not so with you savings account. The following year, you earn interest on the “tax wedge”, too. So suppose you earn 10% on each account and you’re still in the 33% tax bracket.

After 1 year:

Good Advice:

Roth balance: $66k ($60k+10%)
Savings balance: $106.7k ($100k + $10k [10%] less 33% taxes on the $10k)
Total of 2 accounts after tax: $172.7k

Poor Advice:

Roth balance: $44k ($40k +10%)
Savings, remaining: $128k ($120k + $12k {10%] less 33% tax on $12k)
Total of 2 accounts after conversion: $172k

After 1 year, the Good Advice has netted you and extra $700, just for not being lazy about the analysis. In Year 2, you’re going to get ANOTHER $700 extra PLUS, you’ll earn 10%, $70, on Year 1′s extra $700, so you be better off by $770 in Year 2, for a cumulative $1470. This continues to snowball.

Now, what about a year like this when there are losses? You may be better off with Ct’s advice, if you realize those losses and offset ordinary income with them. BUT, if you expect to regularly lose money in the market, then you shouldn’t invest at all, of course, so stick with the good advice, and get your retirement and tax advice from intelligent professionals.

wrong! all things being equal, $60k in a 401k is the -exact- same amount of money as $40k in a Roth IRA (i’m simplifying some things a bit).

So let’s say you have $60k in a 401k and you’re going to roll it over into a roth IRA. If you just have the taxes taken out from your 401k balance, in the 33% tax bracket, you’ll have $40k in a Roth IRA. If you choose to pay out of pocket, u’d have to front that $20,000 of AFTER TAX dollars, which is the same as $30,000 of before tax dollars.

Of course, u’d then be able to write off this tax payment in your tax return and at the end of the year recoup $10k and end up paying (net) the same $20k in taxes as u would a 401k.

the time to make up the difference is exactly 0 years. The rules are in place to prevent and discourage abuse of 401k/IRA programs. They’re designed to make the net gain as close as possible to 0 (zero) when converting.

The only major difference is that if u pay out of pocket, you’ll have to wait until the end of the year to get 33% of your money back.

You take the doomsday approach, which is fine, but what if Roth IRA’s are still going strong and have been adjusted for inflation in 2030 with BETTER benefits?

I think you MUST have your foot in BOTH types of IRA’s. One where you will be taxed and and have required distribution at 70 and another that will not get taxed that can be used after you have spent down your first IRA.

I say take the tax write off today because YOU CAN. Better a tax write off today than hope for the best when you retire.

Good find!