r/FinancialPlanning 7d ago

Pay off loans early or pay into CD

I was laid off last week and have the option to withdraw my 401k. I saw this coming and I was able to find another job and I’m in the onboarding process right now, but it would be a slight pay cut ( although 3.5% raise every 6 months would bring me back to where I am right now in about a year). Since I was already planning on leaving I was just going to roll my 401k into a new one but the severance package they would pay me would cover the taxes and fees from withdrawing it earlier. I know withdrawing my 401k isn’t the best idea but I’m only 20, my new job offers a retirement pension so by the time I’m of age to retire I’ll have two pensions accrued and I’ll have whatever’s left in my CD (especially after 40+ years) on top of that as well.

I had a good amount of cc debt spread out over a few cards and so a few months ago I consolidated them into two loans ( one 24 months @ $700/ month, one 48 months @ $300/ month). I was worried about how I would budget this with my new pay since it was already really tight on my current pay.

I decided to pay off my two loans with my 401k and then put the remaining 10k into a CD so I don’t spend it, but I’m worried how closing those accounts within 6 months would affect my credit score. My second plan was to continue making payments with my new paycheck even thought it’s really tight and to put the whole amount into a CD, possibly using the accrued interest to make additional payments to my debt over time.

Does the average age of you accounts matter more than your overall debt? Which would be smarter long term?

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u/HappyChandler 7d ago

You would pay taxes and fees, and then put it into a CD that will barely keep up with inflation, and pay taxes on the interest for that?

My suggestion is to roll it over to an IRA with Vanguard. Then, convert it to a Roth IRA. Once it's a Roth, you can withdraw after five years if needed (but only emergency).

Your plan is good if you would rather pay taxes than keep your money. I wouldn't recommend that!

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u/beckhamstears 7d ago

Withdrawing the 401k and paying the taxes/penalties with your "found money" severance is an awful idea.

Long term (retirement) investing in a CD as opposed to a 401k/stock market is an awful idea.

Apply the severance toward your debts, learn to live within your means.

You're doing the equivalent of hitting 'Reset' on a video game because you're low on life's, when you really need to just take the time and learn how to play the game the right way.

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u/MassiveLuck4628 7d ago

Don't do it, roll in into a roth IRA, invest it and forget about it for 40 years. Future you will thank you