Is it ever a good idea to use retirement money to pay off debt?

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:Penny wise, pound foolish would be a person who coupons aggressively (penny wise = smart with small transactions), while buying Louis Vuitton bags for her toddler to play with (pound foolish = not smart with big transactions). The meaning being it doesn't make a difference if you are good with the little things if you blow it on the big things.

This situation is not a penny wise pound foolish situation. This is a situation where a manageable amount of debt can be consolidated or dealt with in a myriad of ways with options available to OP with a little bit of work. How long would it take for the 13k debt to incur another 5k of interest? Because the liquidation of the retirement account will lose 5k in an instant. 13k is not a small sum - it could be 192k at retirement age if the market averages 8%. How many extra years of working will it take for OP to make that up?

Money management is all about financial sense and delayed gratification, NOT allowing feelings to get in the way. OP just needs a plan and to start acting on it.

this is an absolutely ridiculous assumption. the market is not going to average 8%. the market can also crash at the time she tries to cash in, she might die will before retirement, etc, etc. not to mention, 192k 30 years from now is not going to buy that much.

penny wise pound foolish refers to a situation where a person is foolishly focused on small monetary gain while overlooking bigger issues with more significant implications. you could argue that CC debt is not that big of an issue, but you are one of those penny pinchers who thinks financial decion-making should boil down to math. that's nonsense, and you are giving terrible advice because of it.

I agree that 8% is aggressive (although the historical average), but whether it is is 5% (72k), 6% (100k), or 7% (139k), the result is still considerably more than ZERO. And no matter the year, 192k or 72k will buy far more than zero will.

I don't know what you want me to tell you about the possibility of death, as it could absolutely happen at any time. I guess that means we may as well not think about kids, retirement, going to work, or personal hygiene, because we may die at any moment. You can function that way if you would like. I will continue to save for retirement and brush my teeth, just in case.

You are advocating for OP to go from a net worth of 5k (13k debt, 13k retirement, 5k cash) to a net worth of ZERO. I (and it would appear a few others) are advocating for the use of information (taxes, penalty, compounding interest, available alternatives) to make the most of the available resources.

You could be right - liquidating and no longer having the debt may make OP feel better. But it would be the same as buying a sweater that you want to wear Friday for 200 on Monday, even though you know you can get it for 100 on wednesday. It might make you feel better, but that doesn't make it a better decision.

If it makes her feel better, that might as well make it a better decision. Though your example so ridiculous because nobody would actually feel better payong twice the price. being debt free is an entirey different kind of situation, perhaps similar in your number oriented view but that is a very limited view.

[Anonymous]

Anonymous wrote:If you only have $13k worth of debt, and you can somehow "fully fund" retirement once this debt is gone ... I don't understand why you can't get it paid off w/o dipping into the retirement fund now. Unless your definition of "fully fund" is different - I assume it means that both parties can put the max amount in per year as allowed by law, which is $17.5k each. If you have that kind of $$, why can't you get the cards paid off??

The max contribution for an IRA is $5500/yr

[Anonymous]

Anonymous wrote:

Anonymous wrote:Oh, OP. How did you get the CC debt in the first place?

If you were mid-20s I would not be worried, but mid-30s is a different story. What happened? I really can't make a recommendation without the bigger picture.

It's from old medical and legal bills. Please see the original post.
- not OP

Thanks, I did.

I meant literally what happened, as in specifically, will this happen again or was it a one-time thing? Chronic illness, uninsured, accident, continuing legal issues, etc? Those would certainly be a huge factor in giving any advice.

[Anonymous]

Anonymous wrote:

Anonymous wrote:If you only have $13k worth of debt, and you can somehow "fully fund" retirement once this debt is gone ... I don't understand why you can't get it paid off w/o dipping into the retirement fund now. Unless your definition of "fully fund" is different - I assume it means that both parties can put the max amount in per year as allowed by law, which is $17.5k each. If you have that kind of $$, why can't you get the cards paid off??

The max contribution for an IRA is $5500/yr

Max for 401K is $17.5 per year (currently)

Max for Traditional or Roth IRA is $5.5K (currently, for those OP's age)

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:If you only have $13k worth of debt, and you can somehow "fully fund" retirement once this debt is gone ... I don't understand why you can't get it paid off w/o dipping into the retirement fund now. Unless your definition of "fully fund" is different - I assume it means that both parties can put the max amount in per year as allowed by law, which is $17.5k each. If you have that kind of $$, why can't you get the cards paid off??

The max contribution for an IRA is $5500/yr

Max for 401K is $17.5 per year (currently)

Max for Traditional or Roth IRA is $5.5K (currently, for those OP's age)

Right. So theoretically, if OP intends to max out retirement after her credit card debt is gone, she means that she and her DH will save $23K each, or $46K total, on an annual basis. Even if most of this is pre-tax in a 401K, that's still a ton more than $13K and there seems to be no reason she can't just buckle down for 6-12 months and pay the debt off without touching retirement.

I don't understand your dilemma, OP. Unless you mean something else by "maxing out retirement" once the credit card debt is gone.

[Anonymous]

My opinion is no. Never ok. Less than $25k is not a huge debt. Not sure what you mean about "maxing out" retirement because the max for a 401k/403b is $17,500. Even if you can max out 2 IRAs at $5k each a year, I don't see why you can't just buckle down and pay off this debt, even with interest.

It sounds like you are mentally stuck because you want a "clean slate". This is adulthood - no one can fix your problems but you. Just suck it up and dig yourself out over the next 2 years. Why would you just throw away all the money you would pay in taxes and fees - PLUS decimate your savings? Calculate how much you would pay in taxes and fees and then imagine taking that much cash and setting it on fire. That's what you're doing just for the mental crutch of a clean slate. There are things you can do to get a better interest rate on your debt but it sounds like you haven't even tried.

Go to the library and get some Suze Orman books.

[Anonymous]

OP, do not do it.

Retirement is protected-- if you every run into trouble with debt/bankruptcy, that asset is yours and no one can touch it.

Also the penalties will take half of your money if you take it from the account. Why would you do that? Just give 40-50% to the government?

Agree that $13K is not very much debt in the scheme of things. I would try to roll it onto a low-interest card. You could also borrow from your retirement to pay off the cards; not my favorite option but better than cashing it out entirely.

Can you consolidate that debt with a debt counseling service (a nonprofit, not one of the for-profit scammer ones!). They can usually lower the payments/interest for you so you can pay it off sooner.

GL and please don't touch that retirement nest egg.

[Anonymous]

OP, I have borrowed against my retirement account at a lower % to eliminate high interest credit card debt before. I racked up a bunch getting divorced and getting by afterwards, and had a hard time making a dent in it otherwise. I'm glad I did it, but I'm just one person in one particular circumstance.

[Anonymous]

Can one or both of you get second jobs to put towards the debt? If you babysat Saturday evenings at $60/night, that's an extra $240/month.