Is it ever a good idea to use retirement money to pay off debt?
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Anonymous
| I have about $13k in an old retirement account (IRA) I want to cash out for credit card debt. The debt is old from medical and legal bills but it's draining us monthly. If I get rid of the debt I can save much more aggressively to retirement. What say you? |
Anonymous
| Will that completely rid you of cc debt? Do you have other retirement savings or is the 13k all there is? Do you have any emergency fund? How old are you? |
Anonymous
| You're going to pay taxes and a penalty on the withdrawal. |
Anonymous
| Yes, do it. 13k is not going to make a difference in retirement. |
Anonymous
False, especially if OP is younger than 40. Compound interest is our friend. |
Anonymous
| I really wouldn't. Can you roll the money over to your current plan and take a loan? The monthly payment will probably be smaller and you won't lost 40ish percent of the 13% to taxes and penalties. |
Anonymous
Cut cable and eating out for a few weeks and you'll be good to go. 
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Anonymous
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Unless the debt was to a guy named Vinny with a penchant for cement shoes I would not use retirement money to pay off debt, since the cost of knee replacement or getting un-dead would likely exceed the tax and penalty for early withdrawl.
The loan idea from PP is a good option, at least that way you are paying yourself interest. Penalty and taxes on the withdrawal will mean you would only get 7,800 from the 13k (10% penalty, 25% fed tax marginal rate, 6% state marginal rate), which may not even be enough to pay it off completely. Far better to roll it over into your employer plan (if they have a great plan, or you don't otherwise have enough in the plan for the loan), or roll it over to fidelity and vanguard so that it can grow. Also, 13k is not an insignificant sum. If you are 30 - that is 71k in 35 years at 5%, 192k in 35 years at 8%. |
Anonymous
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OP here. Mid 30's. No employer sponsored plan. Even after the penalties, combined with the cash I do have, I can pay off the debt in full iwth the retirment money.
And then my plan is to max out both my and my husbands retirement accounts moving forward. Currently, we aren't able to contribute because all our extra money goes to these high interest cards. And yes, we've cut cable/eating out etc and still struggling to get them done. |
Anonymous
| Can you roll the CC over to 0% with balance transfer offers? I get that it will wipe out your debt but that is a really high price to pay. So basically your can fully fund your IRAs once the debt is wiped out? What a re you contrinuting now? The debt must only be $7-8K, so not a horrible amount of debt. Certainly not worth losing at least $4-5K to taxes and penalties. I know it seems like an easy fix but really it isn't. |
Anonymous
The debt is $13k with pretty high interest rates on the cards. Yes, we'll be able to max retirement once the debt is gone. And still have savings leftover. |
Anonymous
The question is how you're going to make sure the CC debt doesn't creep up again. What is your plan if additional medical or legal expenses arise? |
Anonymous
Without the credit card debt, we can max retirement AND save additional money to our emergency fund each pay period. |
Anonymous
Wait - the debt is 13K? I thought the retirement account was 13K? If the retirment account will wipe out the debt, than the retirement account must be nearly $20K. |
Anonymous
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No. Instead, pay it down.
First, stop using your credit cards. Cold turkey. You'll get used to it. Second, try to renegotiate your interest rate. Sometimes it only takes a phone call. Third, rank your credit debts by interest rate, highest to lowest. Pay monthly fees for all, but pay the maximum you can afford to pay off your highest rate debt first, then go down the line. Fourth, resolve never to do that again. |