I am 38 years old and married. Because of a mix of bad luck (multiple lay-offs between my husband and I over the years which led to months of unemployment, unexpected major medical bills), choice (job change years ago led me to switch careers by going back to school and not working for a year) and bad mistakes (lots of credit card spending...mostly just to "survive", but sometimes just frivolous spending), we have acquired a massive amount of credit card debt.
We currently make $115,000 combined gross income (this has just recently increased due to my fortunate job promotions over the past 3 years). 3 years ago we were only making $75K combined and 5 years ago we were making $30K combined. So, I'm very proud of where we are now.
But...back to the problem. We have $65K in credit card debt. I am very strict with our budget but the last year has proven to me that getting that debt down is just not working. We are only paying the minimum on the 11 cards we have for a total of $1500 a month in minimum payments. Our income per month is exactly equal to our expenses. We are so extremely stressed and it's been like this for years.
I never, ever considered doing this until now but I really, really think it's the best way to get debt free and get out of this hole. We are considering cashing out our IRAs and 401Ks to pay off this credit card debt. We currently have $70K in these investment funds. If I'm doing the math correctly we would have about $40K after tax penalties to pay off most of this $65K debt (we would only withdraw $60k of the $70k of investment funds in order to stay within 25% bracket...see below about that).
Every Feb we receive $4K in bonuses and about $2K in taxes so we would be able to pay off the remaining $25K in 2 years (because we would also be able to pay $500 per month toward the $25K because of the $1000 of month savings we would have by paying off the $40K). After the credit cards are completely paid off we will have at least $1500 a month and can really focus on quickly saving for retirement. Currently we aren't even investing in our 401Ks because we can't - there is no extra money for it and I don't see that changing any time soon because there is just no extra money at all. Let me also add that we also have $15K of personal loans and $20K of auto loans which equal $1100 a month in payments. I have $45K in student loans which I have been deferring for years now and next April I have to start paying on ....no more deferment allowed. That will be $400 a month. We also have $50 in savings and that is it. That really, really makes me very nervous.
It's all a mess, I know!!! I need some kind of reassurance that we are making the right decision to do the early withdrawal. I know most people will say it's a stupid thing to do, but I truly feel it's our best choice. I will not consider bankruptcy. And we are not going to sell our house or cars. There is no more cutting of expenses.
A couple of questions:
- We are currently in the 25% tax bracket. I was thinking we could make one withdrawal before the end of this year of $30K and still stay within the 25% bracket and then early next year make another withdrawal of $30K to again stay within the 25% bracket. At least by doing two separate withdrawals we are avoiding the 28% bracket and saving a little of money. I also am aware of the 10% penalty. Am I thinking correctly and can I do the 2 separate withdrawals?
- Is there anything else I'm missing? How would the withdrawal affect my taxes on my regular income or would that just remain the same? In other words in Jan when I do my taxes I'm assuming I would just show that I made $145K for 2014 (our $115K income and the $30K withdrawal) and we would be taxed on that.
Oh - and it goes without saying - we are through with credit cards. If we don't have the cash, we will not be going on that vacation or buying that product. It's just how it is. Thanks for any advice!!
Edit --- All very good points. Yes we have accumulated quite a bit more expenses just recently. My daughter just started attending private school in the last year and we pay 500 a month. Prior to that we paid nothing for daycare. Also we purchased a car for me a year ago which is 375 a month. Probably shouldn't have done it but the car I was driving was on it's last leg. I hadn't purchased myself a car in 10 years and hadn't had a car payment for 7 years. I thought about the 401k loan idea. Honestly it just sounds so wonderful to be nearly debt free and to have 1500 a month extra to not have to pay credit cards and that is why the ira withdrawal is oh so appealing. I'm so sick of this debt (I know it's my fault). The 401k loan is an option. Only problem is that my husband and I have worked less than 3 years at our jobs and haven't accumulated very much in the 401k. He has 13k and I have 9k. But - we do have 45k in iras. Last night I did some research and read about reverse rollovers which I hadn't heard of before. Do you all know much about it? That is - rolling over the ira money into our 401ks. If we can do thag and take out 50 percent we could get app 35k to use toward our debt which would be great. Instead of 1500 a month we would spend about 1050 a month (630 from the 401k loan and 425 for the remaining credit cards). Not sure if I would be able to do that at work. I work for the fed goby and I doubt they allow a reverse rollover. Honestly though I'm still very tempted to just cash out all of the iras and 401ks and just pay off 40k of the debt and only pay 425 toward credit cards per month instead of 1500 (or 1050 by the 401k route). Thoughts??