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I'm very recently divorced and have accumulated the following credit card debt, both during my marriage and during my separation, when I struggled to get by while paying both a mortgage and rent on my apartment:

  • Card #1: $20,000 balance, at 7.24%
  • Card #2: $2,500 balance, at 18.99%
  • Card #3: $2,500 balance, at 19.24%

I have four retirement accounts:

  • $60,000 in an annuity - This used to be an IRA but my financial "advisor" suggested I change it to an annuity a few years ago--I suspect this was mostly motivated by her commission rather than what was best for me. I didn't scrutinize this enough and went along with it.
  • $4,500 in a SIMPLE IRA at my current employer, to which I contribute $250/month.
  • $7,000 in a 401k from my previous employer
  • $1,800 in a 401k from another previous employer

I make $100,000 a year but was extremely generous with my divorce settlement so I don't have a lot of extra money to pay down my debt. I'm looking for a second job to do that, but that will take some time because I need something that will fit in with my current full-time job. (That is, I need something I can ideally do at night or on weekends from home.) I'm not accruing new credit card debt, but I haven't been able to chip away at it much either.

My question is this: Should I bite the bullet and withdraw $25,000 from my annuity and completely clear out my credit card debt? I know this will incur a 10% IRS penalty, as well as (most likely) an additional surrender fee--I'm still checking with the annuity people to see if there is one.

I know that digging in to retirement is generally frowned upon--but on the other hand, carrying a hefty CC balance is bad. Also, at some point in the next few years, I'll be looking to buy a house with my new partner (who also has a full time job and income), so I'll be a more attractive borrower without CC debt. And then there is the peace of mind knowing that this debt is not weighing me down.

I welcome advice on whether this seems like a good move, given my situation, as well as other factors or options I might not be considering. Thanks.

EDIT: Monthly income/expenses:

  • Monthly net income is $6000 (post IRA contrib., health ins, etc.)
  • Rent: $1250
  • Alimony/child support: $2500 (ex pays mortgage with part of this)
  • Groceries: $500 (three teenage boys)
  • Car payment: $237
  • Utilities, home supplies, gas for car: $400
  • Medical copays, gifts, entertainment: $175
  • Kid expenses (music lessons, karate): $275

That leaves about $600, but I've left all kinds of small things off, and this doesn't include large one-time expenses (car repairs, broken dishwasher), nor is there any room for any kind of savings. So basically, I have no wiggle room at all, which is why I realize I need to get a second job. Also, there is very little room to cut in the expenses listed above. "Entertainment" is often $20 a month or less, and is basically my boys renting movies online or buying the occasional $1.99 app. (very, very rarely do they go out to the movies, which is much more expensive).

  • Can you please provide details about your monthly income / expenses? What is your after tax monthly income, your monthly mortgage / rent payment, etc.? I'd like to see the numbers that back up your statement: "so I don't have a lot of extra money to pay down my debt". – Powers Jul 6 '15 at 15:04
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    You may very well have a claim against the salesperson who sold you an annuity for your IRA. IRA money is already tax deferred, and much of the snake oil surrounding annuities surrounds the tax savings. Putting IRA money inside an annuity isn't recommended even for those desperate to throw away their money. – JoeTaxpayer Jul 6 '15 at 15:34
  • @Powers: Sure, I just edited the post. – johnnyb1970 Jul 6 '15 at 15:48
  • @JoeTaxpayer: Thanks for the info. I am going to get my annuity contract when I go home for lunch and check out the details. I'm really mad at myself for agreeing to it in the first place. – johnnyb1970 Jul 6 '15 at 15:49
  • what are the terms of annuity (monthly payment, fees, maturity or interest)? – Max Li Jul 6 '15 at 18:37
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I would recommend to draw 25000 from annuity at 10% penalty.

Its important to understand that you pay the interest on credit card debt per annum. You pay the penalty on withdrawal from low-yield annuity only once!

Imagine that you don't pay your credit card debt for 3 years. It explodes from 25000 to 33116 (more than 8 thousands wasted!)! The average APR of your card debt is (minus for you) 9.82%. That is you pay your penalty each year!

I didn't get exactly how your annuity works, but given 1% of "guaranted" effective interest, I wouldn't expect much above it.

If you want some kind of mixed solution and gain some time, you could first pay off the card debts #2 and #3, then the APR goes down to (minus for you) 7.24, i.e. that of the card debt #1. However, even in this case you should draw money from annuity at penalty, if you can't pay it down in let's say 1.5 years.

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    Thank you! This seems to make the most sense to me, given that it appears that I won't have any extra surrender fees if I withdraw the money. – johnnyb1970 Jul 6 '15 at 19:29
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    You're welcome! btw, you apparently have also the car loan. I would also look on conditions there, maybe there's an option to pay it off prematurely. It could be a "card debt #4" in disguise. – Max Li Jul 6 '15 at 20:26
  • @johnnyb1970 I don't know much about annuities, but what kind of return are you getting on it? If you are getting above or near 7.24%, it may make sense not to use the annuity to pay down the $20k debt. While true that you only pay the 10% penalty once, you lose out on any compound returns on that money. Paying down the other $5k is more clearcut. – Eric Jul 7 '15 at 13:27
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    Don't forget that in addition to the 10% early withdrawal penalty, the $25K will be reported as income to you, and will figure into your adjusted gross income, so you probably will end up paying more in income taxes this year. – Kent A. Jul 11 '15 at 13:15
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I would be very careful with annuity products. If you don't mind sharing, what are the terms for the annuity?

Usually I would recommend not to use retirement account to pay off debt, mainly because of the penalty that comes from withdrawing prematurely. But in this case, First of all, stop contributing to the annuity account if you're not contractually obligated. Second, try to convert your annuity assets to more common equity/debt products. Thirdly, try to cut back on spending to pay off debt, assuming you stopped paying 2X on housing, since 30k debt shouldn't be that hard to pay off with 100k income. Lastly, if all of the above are impossible, you can withdraw from that account to pay off your debt.

  • +1 for "try to cut back on spending to pay off debt". It sounds like OP should stop going out to dinner, stop all his hobbies that cost money, and eat rice & beans till he pays off his debts. – Powers Jul 6 '15 at 15:08
  • @Tom Sun: I need to look at the contract (which is at home at the moment) to review the terms. I've never contributed anything to the annuity, other than the initial transfer. – johnnyb1970 Jul 6 '15 at 15:51
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    @Powers: I don't go out to dinner often, but can definitely try to cut back. (Usually, it's more a matter of getting a pizza because I've worked all day and have to feed three hungry teenagers quickly. But I usually cook.) But your point is well taken. – johnnyb1970 Jul 6 '15 at 15:52
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    @Powers: Also, I don't spend much of anything on hobbies, NEVER go on vacation, and am, in general, very conscientious about spending money. But on the other hand, I'm not going to tell my kid "Sorry, you can't rent a $2.99 movie, or we can't go out to eat once in a while, until I pay off my $25,000 debt." :) – johnnyb1970 Jul 6 '15 at 15:56
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    With all things considered, assuming you won't get dinged on back end load, it might make more sense for you to take the money out and pay for the debt. – Tom Sun Jul 6 '15 at 19:25

protected by Chris W. Rea Feb 3 '17 at 14:18

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