Personal Finance Q & A
Pay Off Debt, but Not With Nest Egg
Q I have $12,000 in my 403(b) retirement account from a job I held not so long ago. I also have a fair amount of credit-card debt, plus student loans I will begin paying off next year. I'm considering withdrawing all of my 403(b) [retirement] account to pay off my credit debt, some of which is at 18 percent, and some at 10 percent. I am afraid that I may have to declare bankruptcy eventually otherwise, although my new job will help avoid this. Mostly, I'm tired of all the interest. Is it smart to use this money to pay off debt?
- Name withheld
A You will have to pay taxes on the amount withdrawn from your retirement account, plus a 10 percent penalty. Thus, if you are in the 28 percent tax bracket, your tax will come to 38 percent, says Gary Schatsky, a fee-only financial planner and attorney in New York.
He suggests that you try to borrow from the 403(b) account, rather than cashing it out. Pay off the higher (18 percent) debt first. Also, you will be able to take a limited deduction on the interest paid on student loans, starting with this tax year. Schatsky recommends bankruptcy only as a last resort. One point: Retirement accounts, such as 403(b) accounts, are frequently protected from creditors in bankruptcy actions. "Assuming you are young, try to borrow funds from family or friends to pay off your debts. Then pay the loans back as quickly as you can," he says.
Q Someone told me that a mutual-fund investor should avoid buying global stock funds and instead concentrate on buying international funds. What is the difference between the two types of funds? Why are there two types of [world] funds?
- C.A., New York.
A Global funds, sometimes called world funds, span the globe. They often invest in companies based in the United States as well as many other countries. International funds, also called foreign funds, invest solely in overseas markets.
Some fund analysts argue that if you already hold one or more US stock funds, there is no need to own a global fund, since it would be somewhat duplicatory. A foreign fund lets you, not a fund manager, decide what percentage of your assets are overseas. Others say it can be healthy if your fund has the option of keeping some money in US stocks, such as for safety in a storm.
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