Should I Cash My IRA Out to Pay Off $19k of DEBT? :(?

Question

Hi All,

First off thank you for reading this.

My question is, should i cash out my IRA early to pay off credit card debt?

Here is my situation:

I am 25 years old and i have about $19k in credit card debt @ 17%.

I have the following saved via IRAs:
- 401k = $40k
- SEP-IRA = $12k
- ROTH-IRA = $13k

Total ~= $65k in retirement accts

Does it make sense to cash out say 2 of my IRA's EARLY in order to get this debt off my back?

The way i see it is my IRA accounts are NOT making more than im paying in interest and basically it is nonsensical to keep bleeding this money. Only problem is based on my research, i see no less than a 10% penalty on my IRAs... so this will be a very costly way to eliminate my debt.

This debt is a real PAIN in my *** as i am currently unable to save money due to constantly paying the Card (and other recurring bills of course).

Any input will be GREATLY appreciated OR if you have an alternate suggestion, I would love to hear it.

Thank you!!

Answer 1

Keep in mind that cashing out the IRA's or taking from the 401k will result in a 10% penalty or more, may have a penalty by the financial institution holding the IRA, and you will be taxed on the funds with potential IRS penalties. As you said this can be a costly way of paying off this debt.

One way to look at this is, if the penalties equal 15% then you would need to withdrawal $21,850 to have $19,000. That is 2,850 in penalties. How long will it take you to pay off the 17% credit card? If the minimum payment of 4% is done at $760 a month then you have 32 months before being paid off. That is IF you don't use the cards again. The interest paid out would total $4,622. So, yes using the IRA can save you some money over time.

Do you own your own home? If so, you could look into a home equity loan to spread the payments out over 10 years at a decent rate. One benefit is interest paid on a Home Equity loan or line can be tax deductible.

You could try contacting the credit card companies to ask for interest rate help or to see if they will reduce the debt if you pay them right now.

One thing I would suggest is once the cards are paid off, don't use them except for emergencies. Leave them at home or better yet in a safe deposit box. Don't carry a credit card in your wallet and you will be less likely to get in this situation again.

One other comment. Look into creating a budget for yourself. This will help you see where all your money is being spent. You may find extra ways of saving money this way.

Answer 2

If you're in a bind and your only source of funds is your IRAs, then I would suggest starting with the Roth IRA. Being under 59 1/2 you are subject to the 10% Premature Distribution Penalty, but ONLY on the earnings, not the principal since it is after-tax dollars. Added to that any fees or investment early withdrawal penalties, it may add up to be less than 17% interest on a $19K balance over time. Then you can also take a loan against your 401K (if permittable by the plan) for the remaining balance and pay it back at a much lower interest rate then your CC. Or you can take a loan for the full amount against your 401K. Ultimately, you don't have to withdraw from the 401K. The SEP IRA, would probably be your costliest option. I would leave that alone.

Answer 3

Cashing in your IRA is a verrrrry costly option. Remember, not only do you incur a 10% penalty, but you ALSO have to pay regular income taxes on the money you withdraw. Also, you lose future IRA earnings on the money you withdraw and those earnings would have had tax deferral benefits as well.

I suggest the following:

o Do not make any more charges unless it's a dire (life or death) emergency
o Drastically cut your expenses for awhile (e.g., cable, eating out, internet service, cellphone, etc.). Do whatever it takes to start paying down the debt at a faster clip.
o If you have any assets you can sell, sell them
o Does your IRA plan permit borrowing from the IRA (many do). If so, this is much better than withdrawing from the IRA
o Borrow the 19M from family, if possible (but not if you think there is any chance you won't be able to pay it back). Do this formally, with a promissory note and collateral (if you have any - equity in your home, equity in your car, etc.). Pay the family member an interest rate that is attractive from their perspective (8%, 10%, etc.).
o Last option - withdraw from the IRA. You're still young and have plenty of time to re-build your savings. HOWEVER, you must avoid building credit card debt again, even if this means changing your standard of living.

Answer 4

I'm going to answer this very simply. I like to draw a distinction between money and wealth. Money is the cash you get paid every month. It is what is in your wallet. You use it everyday. It comes and goes. Wealth is long term money. It is the money working for you to build a better future. Your IRA's, house, etc, are all wealth. You work hard to build wealth but it's worth it.

From a mental perspective, I'm sure you would find it tough to take money you worked a long time to save to pay off a debt. Plus, you lose the compounding effect of the investment. You tell youself that you will pay it back, but you never really fully do.

I would advise trying to find a lower interest rate for the debt and working hard to make it go away without touching the long-term stuff.

Answer 5

Leave the IRAs alone. You would have to pay a 10% early withdrawl penalty plus pay income tax.

Instead you have to concentrate on paying off the credit card debt. First, stop charging on your credit cards.

Second, make a strict budget. Eliminate the extras -- eating out, new clothes, cell phone etc. Put every penny you can squeeze out of that budget on the highest interest rate credit card, while paying the minimum on the rest. When the highest rate card is paid off, move to the next till they are all paid.

You can have it all paid off within 2 years if your work at it.

Answer 6

I would also look into reducing your interest rate to something manageable first. However because the interest rate on your CC debt is significantly higher than the long term return of the stock market (roughly 10%/year) I would make paying it down a priority if you can't get the interest rate down and dip into other savings to do it if I were you.

Answer 7

I would say No, I took out my loan on my 401K and I paid a huge amount of taxes on it. If you are a homeowner I would suggest just taking out a small loan against your equity to assist in your debt paying, that way it also becomes tax deductible as well.

Answer 8

There should be no penalty in cashing out your ROTH as you paid taxes on that money already. And since you're 25, you have a lot of years to put that money back.

Answer 9

Have you tried contacting one of those nonprofit credit counseling agencies to see if they can negotiate with the credit card companies to lower the rate of interest you are currently paying? Have you looked at transferring your balances to 0% interest credit cards? I took advantage of one credit card to have no interest for 1 year. I would look at these alternatives before tapping your IRAs. That should be a last resort.

Answer 10

better do it as soon as possible the interest you got from IRAs is not enough to cover your debts later on. just get the amount that you need save the remaining amount that way you save more. save the money that you use for paying your debts. get more saving, no worry later on.