Withdraw IRA Funds after Divorce

Question

So I know that in most cases, withdrawing cash from a retirement fund is never a good idea. However in my case, my ex husband left me with a decent divorce settlement but over 25K in credit card debt. I have the house, got a decent chunk of his 401K and custody of our son. With the house, i don't have enough equity where selling it will really help b/c then i would be paying the same amount in rent and would have nothing after closing expenses.

There is about 46K in that IRA. My idea is to withdraw about 18K to pay off about 90% of that debt, therefore freeing up 400 a month. Some of that will go into savings and some back into investing into my IRA. It's important to me to keep monthly expenses low since i no longer have a financial support back up.

The company i was with for 13.5 years went bankrupt after being in business for over 90 years. Two weeks after that my husband asked for a divorce, and I basically took whatever job i could get in light of what was to come however this job pays much less than what i made previously. My interest rates are low on my credit cards, at about 9-11%, but I am only able to pay the minimum each month. In total, the amount i'm paying out each month is killing me and making it very difficult to save for any emergency whether with the house or my son. If that were to happen, i'd have to turn to my credit cards and eventually end up paying MORE out per month because of that. I do not have relatives to borrow from and honestly, i wouldn't if i did.

I thought my best option is to withdraw the funds now because since my divorce was mid year, this will be the lowest income year vs next year because I have only had a few months of alimony that I need to add to my tax return. I honestly can't figure out what else to cut. We are down to essentials at this point.

Below is approx:

Mortgage 1736 (this includes all tax and insurance)

Childcare 500( my portion)

auto 320 (insurance paid until Apr 2019)

household utilities 450-500

Food and household essentials 550

Gas 180

Net income including alimony and child support 4300

I have about 10K in savings right now but that does not go far, especially when you have to buy a new air conditioner and have all your duct work changed out partly because of mold and partly because rats ate through it. Yeah... Any advice would be appreciated, thank you!

**** I am 39 years old**"* In terms of increasing my income, that would mean making a job change, which right now is risky, especially on one income with a toddler. **"Regarding the air conditioner, that's a real thing. I purchased another air purifier as a temporary solution which helps us both sleep a lot better, but that's really just a bandage on a faucet. My energy bill is outrageous because the bad duct work is air-conditioning the attic crawl space. My part of Florida is hot and humid 10 months out of the year so there is no break on that.

**** my alimony is court ordered part of the settlement and has to be paid for 12 years or until I marry. If child support goes down as our son gets older, the difference is added to alimony. But yeah, god forbid he loses his job!

*** I looked into a home equity or line of credit and I just dont have the equity in the house. We've only owned it 3 years. ***** I am trying to be moderate as to what I withdraw because that was also part of my retirement 401k from my previous employer. I can pay off the card with the highest interest which also has the highest balance, and manage the other two OK.

Answer 1

Its definitely a tough spot to be in, and you certainly have my condolences on your situation. What you experienced is not uncommon, things come at us all at once. This is why having debt is such a bad idea. These problems would be much easier to weather if did not have a car payment or credit card debt.

Your problem, to me, is that you have very little margin between income and expenses. As such careless, expensive decisions resonate further in your bottom line then someone who has a decent amount of "disposable income". You cannot really afford to make bad decisions.

If you do take out 18K from your retirement accounts you will owe tax and a penalty on that money. So the net result would be about 12K or so. That seems like it would only pay off about 1/2 your debt, not the 90% you are counting on.

Is the air conditioning statement hypothetical or do you really need to spend money to get it fixed? Is there a lesser repair that can be made or can you barter something to lessen the cost?

Here is a big question: What are you doing to raise your income? Do you think that can happen anytime soon? Still with the budget you laid out you have an extra $600 in income each month. That is far better than some.

For people in your situation I would recommend Dave Ramsey's program for debt elimination. They are laid out in 7 baby steps that are easy to learn, easy to comprehend, but difficult in execution. You will have to do things that are a bit uncomfortable now to lead a better life later.

In probably about 3 years, I can see you having no consumer debt and a fully funded emergency fund. That 401K will not only be left untouched, you will be adding to it. You will probably be making more then you were at your old job. I believe that you can do it, and you won't be so stressed out about money.

You also need to be prepared for your ex-husband to stop paying. Very few of these arrangements go off without a hitch and even if he is does is level best to live up to his obligations, a temporary job loss may reduce your income drastically in the short term. However, not everyone has the character to live up to their obligations.

Be strong, you can do this.

Answer 2

You should definitely consider other options for refinancing the debt before withdrawing from retirement accounts to pay the debt down. Even if you could roll the money into your current employer's 401(k) plan and take a 401(k) loan, that would avoid the penalties. In any case, it would be better to leave that money untouched and look for other ways to finance the debt, whether by refinancing/2nd mortgage or home equity loan, or some other loan consolidation techniques.

You are right that your top priority should be to get rid of this debt as aggressively as possible. Another option might be to call your credit card companies and see if they have any options available to reduce the interest.