I'm 37, should I use part of my IRA to pay off credit card?

Question

I have $7K due on my Visa, from 2 years of trying to make a living selling real estate. I am not an overspender and am now in a stable job with a regular paycheck. I have $60k in my Schwab IRA, rolled over from jobs where I put the maximum away since my 20's. I know everyone advises against it, but I'm paying 16.24% on the Visa ($1000 per year).
I propose to withdraw $8,000 from the IRA, which would be penalized about 38% (10% penalty + 28% taxes), giving me about $5,000 toward the debt.
I propose that by keeping my credit clean and saving that $1000/year will be worth it to me when I go to buy a house using the $52,000 to borrow against.
It's my money, and I would have and will pay the income tax on it at some point - to me 10% seems like a better penalty than the 16.24%.
Theoretically, I can put the money "back" under the $4,000 allowed per year.
Please advise! Having this debt seems to hurt a lot more than losing money I never really feel like I had in the first place.

Answer 1

the problem with your scenario is is that your 60k is comounding on all 60 k, if you take out 8k you only now compounding on 52k, your money grows faster when you have a bigger sum to compound against.
how much does your current job pay?
i could easily pay down a 7k visa bil inside of 5 month by making huge payments and living very frugal
i paid down a IRS tax bill at 25% of 13,500 in under 8 months so it can be done, it's just a matter of priorities, which you do seem to have some of them straight.. just not all. And I suspect you seem to fall into a living pattern that keeps that credit card balance floating up there and watching it never go down much.

pay it down or get a new credit card in which the balance is transferred to a lower APR or 0 APR, but in any case do not charge a dime to that new card, just make the payments and be on time if not early. once you charge anything to a new balance transferred credit card, the entire balance ( any new chanrge plus balance transfer ) gets charged whatever rate they are charging or current lines of credit. worse yet miss 1 payment of be late even 1 day and the balance can shoot up to 29.99% as they will assume you a "risk" and keep your rate their.

Answer 2

Although I agree with your plan to pay back if you borrowed against your IRA, I would leave it as is. 16.24% from my years of banking is a decent rate, especially for a credit card now a days. If you're truly looking to get rid of this debt, have you considered a regular personal loan from a bank? Most personal loans can be paid back within 4 to 5 years and typically don't have any early payoff penalties. You would have a set minimum payment, but have the options to pay more towards the balance. Fair warning, you may not get as low a rate than the one you have. I would also consult with a Schwab adviser, they might be able to give you a different approach(such as borrowing against your IRA vs withdrawing.)

You also may want to check how much you can withdraw at a time - there may be limits to what you can withdraw within a tax year.


Good luck!

Answer 3

I'd strongly advise against doing that! Not only will you have the tax bite, but you'll lose the compounding on the $8,000 that you withdrew. That could cost you tens of thousands by the time that retirement rolls around and could be the difference between eating dog food or a decent meal in your "golden years."

Your "plan" to roll $4,000 back in is flawed since you will still have to pay the tax and penalty on the amount withdrawn. Unless you can redeposit the funds within 60 days, it will be taxed and penalized.

A much better plan would be to cut to an austerity budget and pay down the high-rate debt as quickly as possible. I paid off over $35,000 in CC debt in a little over 2.5 years by dumping unnecessary expenditures such as frequent dining out, cutting to basic cable and brown-bagging my lunch.

Once I got off the "spending binge" I found it much easier to REALLY start saving and now have more in the bank than my old CC debt was AND am now maxing out my retirement fund deposits as well. I can now truly afford to say, "Take this job and shove it!" That, my friend, is TRUE freedom!

Answer 4

16.24% is a very high interest rate to pay. If you have something substantial to give for security, you should be able to borrow money from a bank to pay off the card at an interest rate that is between 1/3 and 1/2 of the interest rate you are paying now.

If you can't borrow elsewhere to pay off this debt at a low interest rate, yes, you would be ahead to withdraw part of your retirement money to pay off the Visa. If you do, you should have a plan to "pay it back" by putting in extra money. You'll likely need it when retirement time arrives.

Answer 5

Your losses from the IRA withdrawl will far exceed what you save on the CC debt. It is mathematically bad.
Start putting a $1000 a month from your check into those CC payments (and maybe get a 0% rate transfer from another card and have it paid off before % kicks back in).
I got a 2nd job and put it towards the CC debt , much better than throwing away your IRA $$.
If you are really get serious , you could have it paid down in 6 months . . . if you understand the math . . .

Answer 6

I would get a second, a third and a fourth job to pay the credit card off. Then STOP using them!!!!!!!!! Leave your retirement accounts alone.

If you are the type of person who is in credit card debt then you would simply be right back where you are now with less money in your IRA to boot, unless you start making a change in the way you are doing things.

Answer 7

NOOOOO if you loose your new job that "loan" will be due in full right then plus you get about a 40% hit on taking out money from retirement.

I think you can do it with a strict budget and you can get it paid off in one or 2 years depending on your salary.

I suggest you read The Total Money Makeover by Dave Ramsey and 9 steps to financial freedom by Suze Orman why you should not take money out of retirement.

Answer 8

I would do it in a hearbeat. Granted there is a penalty but it sounds like you are very stressed over this debt and paying it off would feel so much better then having it lingering over you.