Should I use my SEP IRA to pay off my debt?

Question

I have a Sep IRA from my old job that I do not and have never paid into that would cover my student loan and most of the rest of my debt. I'm in a debt management program, which gives me a decent interest rate on the debt I incurred when I was not able to work. But I am left with little/no disposable income & a stinky credit rating. I'm scheduled to be done in 4 more years, but I'd like to have some disposable income & be able to build a little emergency savings while fixing my credit ASAP in prep for buying our 1st home. Just waiting for hubby to finish his Master's and secure a new job in the Fall.

I have a 401k at my new job and I try to make a little money on the side, but don't have a lot of time for that with a 3 month & 3 yr old. So, I'm working extra hard at the 9-5 to target a raise in the Spring. I just want some peace of mind, to be able to afford a haircut once a quarter and to see the possibility of home-ownership sometime...

Can anyone suggest a good plan?

Answer 1

The tax consequences of early withdrawal before age 59 1/2 from any retirement account will be 10%. If you are willing to accept this fact, then by all means, use your IRA funds to pay off the debt. I wouldn't suggest you do that because you will lose the earning power if you withdraw money from the IRA. Your SEP IRA may or may not be growing at all since you don't work there anymore. So it may be wise to roll it over into a Traditional IRA. Then 12 months after that, roll it over again into a Roth IRA.

Here is what I would do if I were in your situation:
1) Create a budget worksheet. That way you can analyze your monthly spending and where you can save money on. The budget worksheet should list everything you spend on, from food, gas, car, insurance, maintenance, entertainment, utility, personal maintenance (ie haircut), clothing, child support, etc.
2) Stop contributing to your 401k
3) If you have any insurance (car, life, etc), shop around for a lower premium.
4) Whatever money you save, use it to pay off the principal balance (if there's no early payment penalty on the loan)

Answer 2

You can do it...but it will cost you in the long run. Taking that 10k now will cost you $125k at retirement. Use EXCEL to figure it out...10k balance earning 8% per year for 35 years. You are far better off financially in paying down your credit yourself then taking this money and paying it down.

Your debt is a finite amount...you will have it paid off in 4 years. But the compounding of income will go on for 35 years. You are far far far better off stopping any payments on your 401k at your new job then you are in taking a withdrawal.

I realize that you want peace of mind...but, you also have to think in the long term...and that's what's important. If you take the easy way now and sacrifice your retirement to pay off this debt then you will have to INCREASE your contributions substantially to make up for this loss. I realize your retirement is a long ways off but that's exactly why you shouldn't do it. The compounding effect will benefit you so much if you don't take a distribution.

If the IRA balance is twice what your debt is then roll your IRA balance into your 401k. Then, after your husband gets his masters and gets a job take a loan from it and pay the debt off. Don't do it before as you have better interest rates from your debt management program then your 401k will give you. But after your hubby gets his job you'll be able to afford slightly higher payments. It's critical though that the terms don't exceed that original 4 year length. You don't want to go backwards here. What will happen is that your credit will repair sooner by paying off the debt, but you won't hurt your retirement as much , you will be paying yourself the interest not the companies, and you wont make things tougher on you with higher payments when you can't really afford it. AND my solution is tax neutral...no extra taxes and no extra penalties. Please please please consider it. This is what I do for a living (401k consultant). I know it's tough, but there is a light and I you will sacrafice the least by following my advice.

Answer 3

If you didn't pay into the SEP IRA, I presume your employer did? Check if there's money in it first. You will probably have to pay taxes and penalties on it if you take it out, so you should see if you're going to be left with enough money to make it worth it.

You also might want to look around and see if there's anything you can sell on ebay. I find that lots of married people got wedding presents that are just sitting unused, and it's worth selling them to get out of debt.

Answer 4

You just said you want to use your SEP IRA savings to pay off debt so you can start to save money.

doesn’t make any sense to me

My plan:

pay off your debts

start braiding your hair

when you get the raise put it in a savings account for your down payment.

Answer 5

you will have to contact me!