I like to tell folks that these days personal finance is like rocket science. There’s so much to know and much of it can be pretty confusing.
Recently I invited Lanta Evans-Motte, a Maryland-based financial adviser with Raymond James Financial Services to answer reader questions during my weekly online chat.
Evans-Motte is a licensed insurance agent, and Registered Financial Consultant. She’s a financial educator and has been a financial literacy advocate for more than 20 years.
Here’s Evans-Motte’s answers to readers questions about their workplace retirement plan.
401 (k) loan vs. credit card interest
Q: My husband and I are thinking of taking a $20,000 loan on our 401(k) to pay off higher debt that we would pay back ourselves in three years and without tax penalties. The interest rate on repayment to the 401(k) is at 2 percent and it all goes back to the retirement account. The high interest credit card interest rate is between 6 percent and 13 percent. We have $19,000 in credit card debt and $300,000 in our 401(k) plans. We are 36 years old and have a joint income of $195,000 a year. Our monthly expenses are approximately $5,000 a month. Would you recommend taking out this loan or paying it off at the current interest rates?
Evans-Motte: Kudos on saving $300,000 by 36. However, with only $60,000 in expenses, where is the rest of your income going? If underlying budget issues exist, then paying off credit card debt with a loan may be a short-term fix only, and could result in taxable income if you suddenly had to leave your job. Consider decreasing spending to pay off the loan instead. Also building an emergency account and savings account might help avoid future debt.
Read more: 8 Reasons to Never Borrow from Your 401(k)
Q: Do you think that it is a good idea to borrow from your 401(k)?
Evans-Motte: Generally, I encourage saving for a goal. I think 401(k) loans may entice people to buy more than they can afford. Plus, it may be hard to repay the loan while maintaining your regular 401(k) contribution and difficult to invest more later to offset the opportunity cost of not having the money invested. If you have to leave your job suddenly and can’t repay the loan, this could result in taxable income and penalties. While you may save interest versus a personal loan or credit card debt, you’ll likely pay tax on the money twice when you repay the loan and again when withdrawn at retirement.
Picking a fund
Q: The 401(k) plan at work has a dozen funds available (probably more like 20). Honestly, I don’t know enough about investing in funds to know how to pick one (or many). I know the market goes up and down and that some have potential for more growth, but that comes with more risks. I am tempted to just pick a fund that mirrors the market index, just because there are too many choices. Saving money shouldn’t be this hard.
Evans-Motte: I hear your frustration. None of us is born with investment knowledge—it must be learned and takes time and effort. This is why I have been conducting financial literacy in schools for more than two decades. Your 401(k) plan should have educational and support tools to help you learn about investments and your specific plan options. If not, speak to your HR department. Target-date funds that are designed to align with your targeted date of retirement may be helpful for getting started.
Disbursements from 403(b) in retirement
Q: I am retiring in January 2018. I will need to take a modest amount of money out of my 403(b) ($10,000 to $15,000 a year) for the next couple of years to cover living expenses. Do you recommend I just take out the entire amount at the beginning of the year or split it up over the course of the year?
Evans-Motte: The timing of the year (i.e. $1,000 a month vs. $12,000 a year) may not matter much. Taking only what you need, as you need it (ie. monthly) might be better.
Retirement rants and raves
I’m interested in your experiences or concerns about retirement or aging.
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Please note it is my personal policy to identify readers who respond to questions I ask in my newsletters. I find it encourages thoughtful and civil conversation. I want my newsletters to be a safe place to express your opinion. On sensitive matters or upon request, I’m happy to include just your first name and/or last initial. But I prefer not to post anonymous comments (I do make exceptions when I’m asking questions that might reveal sensitive information or cause conflict.)
Have a question about your finances? Michelle Singletary has a weekly live chat every Thursday at noon where she discusses financial dilemmas with readers. You can also write to Michelle directly by sending an email to firstname.lastname@example.org. Personal responses may not be possible, and comments or questions may be used in a future column, with the writer’s name, unless otherwise requested. To read more Color of Money columns, go here.
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