18

Should I withdraw $45,000 from my IRA to pay off credit card debt?

I am 63 years old. Because of a change in employment status for the last 4 years I went from full time to part time. In order to survive I had no choice but to use my credit cards. While I did look for full time work, I was unsuccessful in finding full time employment. Since then I am now back to full time status. While my current salary is $100k, my credit card debt is approximately $45,000. The average interest rate is approximately 13%. I have been able to do some balance transfers but for only about $5,000 of the debt. I have an IRA with approximately $230,000.

I don't know if I would be paying more in interest to the credit card companies paying every month for the duration, which is years paying the minimum, or would I pay more taxes if I withdrew $45,000 to pay off the credit card debt.

While I do try to pay either double what the monthly bill is, or at least $25 extra, the interest I pay every month is still high. I have one mortgage and one open line of equity on my house and my monthly expenses are approximately $4,500 (not including the credit card debt).

On top of everything else, because I was not able to keep up with the upkeep of the house, it has fallen in disrepair and I need approximately $15,000 worth of work in order to make is sellable. I am hoping to sell the house to pay off the mortgages.


Thanks to everyone for your kind answers and advice. I actually do not have a spending problem. I didn't get into great detail on my credit card use because I was just seeking an answer on IRA withdrawal vs. credit card interest. I can honestly say I did not use the cards for anything but necessity. During the time of my unemployment I had a accident and broke my foot. No insurance. My hot water tank had to be replaced as did my washing machine along with 2 small roofs on my house that had to be replaced as roof leaks caused internal water damage, as well as the railing on my porch needed to be replaced due to termite damage. My insurance company would not re-insure my house unless those repairs were made. These were all very big ticket items, especially the medical bills. When I went through my savings I had no choice but to use credit cards. So yes, I needed them to survive. While I was able to work on a part time basis it was hardly enough to cover expenses. Monthly expenses are now approximately $6,000 with mortgage, equity line, heat, electricity, food, gas for car, cable, cell phone, general upkeep, and of course credit card bills. I am lucky enough to get my job back to almost full time so while I have a good salary, it's still not what it was. I live in a major metro area. In all of you answers I will continue to pay on the credit card debt and double up whenever possible on payments and not withdraw from my IRA. I do not use my credit cards at this point because I can now use my salary to keep current. It's very hard to get the credit card debt down when you pay so much in interest, even with the extra payments. That is why I asked the question.

  • 1
    Related: Should I withdraw money from IRA or refinance home to pay credit card debt? (Not identical, because the income of the OP is very different.) – Ben Miller May 16 '16 at 16:48
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    Is your IRA earning more than 1.08% a month? – Matthew Whited May 16 '16 at 20:37
  • Also, what kinda of IRA? – Matthew Whited May 16 '16 at 20:38
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    On the subject of your house, if you have equity in the house, you can consider taking a concession of $15K on the sale. Depending on your market and the desirability of the location, it may not make a big difference to what you net on the house. Spending $15K to avoid taking a $15k hit on the sale doesn't really get you anywhere. – JimmyJames May 16 '16 at 21:16
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    Home buyers are not smart enough to make this work, in general. My (several) agent friends say that the sale price usually goes up many times more than the cost of fixing obvious defects in the house. They simply pass on the house that looks bad. The only exception is if a specific area has an unusual demand and low supply. (I understand it's pretty much the same for cars.) – Jeffiekins May 17 '16 at 21:47
47

If it was me, I'd cut my lifestyle and be done with the debt. You make a great income and I assume you take home around 6000/month. The IRA is not very much and you will probably need it in retirement. This statement alarms me:

In order to survive I had no choice but to use my credit cards

It was unlikely that dramatic, if you chose to NOT to use credit cards you and your love ones would still be alive. The statement is indicative of someone who will have a hard time living off of unearned retirement income. Might as well learn how to live on a budget now.

Cut back your budget to around 3K and throw 3K per month at the credit card debt. You will be done with it in 18 months. This is not an interest rate problem, it is a budgeting/spending problem.

Then start working on the rest of your debt and the repairs. Do the repairs as necessary, and reduce your debt. If you really get to work on this, you can be debt free in a short time and be ready for a nice retirement.

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    +1. Reducing the monthly expense budget is the real key here. If the OP cancels out her debt with her IRA and doesn't make any changes to her spending, she will find herself in the same situation again when her employment status changes again. – Ben Miller May 16 '16 at 17:03
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    If those expenses are from medical bills, it's possible that using credit cards was a matter of life and death, especially considering that OP is 63. – Cody May 16 '16 at 19:42
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    Key word: unlikely. – Pete B. May 16 '16 at 19:44
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    "This is not an interest rate problem, it is a budgeting/spending problem." Good answer. – Aaron Hall May 17 '16 at 2:48
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    Especially the comment about paying the minimum amount worries me. No-one with an income of $100k should be paying the minimum on credit cards. The OP should be able to pay at least $1,000 per month towards the balance, starting with the highest-interest card. 2 years after we were married, we had a combined income of $50-55k, and student-load debt around $500/month. We decided to buy a house, so we stopped eating out & buying clothes, and refinanced the car loan. This put $1,000/month in our savings, and we had a down payment in a year. Cut back, then cut back some more. – Jeffiekins May 17 '16 at 21:55
16

At the risk of getting down-voted on my first post to this site, I've got to point out a couple of things here that can help. I personally got in a little over my head with debt about a decade ago. It was on the same scale as this relative to my income at the time.

Look for a better deal on interest. As one of the other answers notes, credit card debt is unsecured so it's not always smart to convert it to secured debt e.g. taking out a home equity loan. There are other options, however. One thing that I did to get out from under my debt was transfer it to 0% credit card offers. This advice is likely to generate some negative responses but I can testify that it can be very effective. Yes, the point of these offers is to trap you but if you play the game right, it can pay off. It's a lot easier to pay off your debt when none (nada, zero, zippo) of your payment is going to interest. Unexpected costs one month? No problem, because you aren't paying a dime for the interest.

If you do this, there are a couple of really important key things you need to keep in mind:

  1. Do not use this account to purchase anything! You will start paying interest and you can't pay off those purchases until you clear the transferred amount. Keep a different (0 balance) card on hand for emergencies. Don't carry this one around. Lock it in the drawer and never touch it.
  2. Always always always make at least the minimum payment every month. Pay every time you get paid. Don't miss a payment. This is really important. It's worth keeping some cash on hand just to make sure you can make the minimum payment for a few cycles if things get really dire.
  3. Know when the offer expires. Mark it on the calendar. Think about that date and how far off it is every week. The key to this is to do another transfer again before the temporary rate expires. Keep in mind that this may not always be possible. See the next point.
  4. Note the interest rate that follows the introductory rate. All things equal, you want the longest period. But if the rate that follows is significantly higher or varies, you might want to pass on the offer. At the very least have an exit strategy that gets your debt to a rate that's not worse than what you have now.
  5. Don't forget that the point is to pay it off and curtail your spending. Yes you aren't paying interest but the clock is ticking. Make payments every paycheck and it should hurt. If your car breaks down or you have to bail your kid out of jail, it's OK to make the minimum payment but it's not OK go to Aruba.

Likely someone will say this will mess up your credit. Things may have changed in the last ten years but doing this actually gave me a really awesome credit score. The reason is that I had many accounts that, at one time, had a high balance and were paid in full and I never missed a payment.

If you don't feel comfortable with this, don't do it. Just keep in mind that 13% is a lot of interest. With your income you should try to find a better deal without going to secured debt. One issue is that I'm not sure such offers are very common now. I used to literally have a stack of these next to my desk. When one was about to expire, I'd start tearing them open and look for the next best one. I'm not sure if they stopped sending them because they caught on to what I was doing or if this kind of thing was a product of the pre-2008 financial craziness.

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    "Always always always make at least the minimum payment every month. Pay every time you get paid. Don't miss a payment. This is really important." Actually, if there is a "service charge" (can be as much as 5%) associated with the balance transfer to the "0% interest for n months" card, then in the very first statement following acceptance of the transfer offer, it is important to pay not just the minimum required payment, but in addition, the service charge and any other fees or interest shown on the statement. See this answer of mine. – Dilip Sarwate May 16 '16 at 21:58
  • @DilipSarwate Thanks for the comment. I didn't run into this or at least I wasn't aware of it but "read the fine print" is definitely a proper warning for this approach. – JimmyJames May 17 '16 at 0:10
  • @DilipSarwate To clarify, the reason I emphasize never missing a payment is that it can trigger a really devastating chain of increased rates. It used to be that this could cause your other cards rates to increase too but I recall some rumbling about making that illegal. In any event you should always pay more than the minimum whenever you can. – JimmyJames May 17 '16 at 0:16
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    JJ - not one downvote. Welcome to Money.SE. I hope you stay a while. – JoeTaxpayer May 17 '16 at 18:41
  • @JoeTaxpayer I guess my fears were unwarranted. I know this concept throws off a lot of the general public but this isn't the typical audience. – JimmyJames May 17 '16 at 19:34
7

Whether you should withdraw from the IRA or not depends on how long it will take you to pay off the cards without the IRA money. Since you are over age 59-1/2, you will only have to pay ordinary income tax, not the 10% penalty. At your income level that should amount to about 25% of the amount, or about $11,000 (a one-time cost). If you can clear the debt for less than that, you're better off if you do so; otherwise it's better to bite the bullet and pay the penalty on the IRA distribution.

So, how much will you pay in interest on the credit card debt? Using an amortization calculator, I get:

years to pay     total interest     monthly pmt
           1           $3231           $4019
           2           $6345           $2139
           3           $9584           $1516
           4         $12,947           $1207

So, you can take a little over three years to pay off the debt and still come out paying less than the tax on the IRA distribution.

It's hard to say if these payments are achievable without knowing how much slack you have in your monthly budget. The table above should at least give you some idea of what your targets are.

(edited to fix mistaken assumptions about the OP's age)

  • +1 for the tax analysis. With $100k/year income, the OP needs to make paying off this debt a priority. If she does that, she'll save money by not raiding the IRA. – Ben Miller May 16 '16 at 17:29
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    This doesn't take into consideration the tax you pay on the IRA money when you take it out in the future. – TTT May 16 '16 at 18:06
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    That's a good point. There isn't really enough information in the question to do that in a comprehensive way. It will matter a lot when the OP intends to retire and when she intends to start taking Social Security. Generally, I'd expect it to be best to take the IRA tax hit in between stopping working and starting Social Security. Taking distributions on top of wages seems like a recipe for paying a lot of tax. – Nobody May 16 '16 at 18:47
7

Three things to consider:

  1. Paying off 45k with a 100k salary is easy if you live frugally. This is like one year's effort at most IF you live frugally.
  2. Retirement assets are exempt from seizure, garnishment or bankruptcy liquidation in some jurisdictions (you didn't say where you were), so in such cases you should not liquidate a protected asset like a 401k to pay off an unsecured low priority creditor. Additionally, it's bad financial sense since you're making a lot of money right now. Even though you're old enough to avoid early withdrawal penalties on the 401k, you'll still pay taxes on it.... and since you're already in a high tax bracket, you're basically bleeding away 25-28 percent of every dollar you withdraw. Unless it's some kind of mafia style 1000 percent APR on the credit cards, this is makes no sense.
  3. If you settle with the credit card company for a lesser amount, keep in mind that they will write off the unpaid amount and if you're not insolvent, the IRS will come after you for taxes on that amount.

My guess is it's probably best to save up an emergency fund for the first few months and then put the rest of your disposable income into paying off the credit cards.

  • It's always easy to tell other people how easy things are. Also settling with the credit card companies will probably require large amounts of cash as they'll ask you to pay the agreed on amount immediately. – ventsyv May 17 '16 at 15:52
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    Getting out from under 45k debt would not be easy on a low or even average income (so I see your point), but OP already pointed out that he/she has a pretty high income. Significant positive cashflow makes a lot of problems easier to solve. – Jim W May 17 '16 at 16:51
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    I don't know where you live but the $2000 per month living expenses you propose is just my mortgage for a modest 3 bedroom. Food is another 500 - 600. If OP is making $100k I think it's fair to assume OP lives in a major metro area where cost of living is much higher. I think it's reasonable to assume OP has no more than $1000 - $2000 of free cash (not allocated to other bills) – ventsyv May 17 '16 at 17:00
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    @JoeTaxpayer No it's not. Add PMI, HOI & taxes and you'll be pretty close to $2000 even with $250k loan. We don't know OP's circumstances so it's stupid to assume OP can live on $2000 a month. What about childcare? Or elderly care for parents? Or ongoing medical expenses? Assertion like that are not supported by any facts and completely irrelevant to the question. – ventsyv May 17 '16 at 19:23
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    It seems to me that ventsyv just came in here to argue. – Jim W May 19 '16 at 12:33
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Some great advice here, but none of it really answers this question:

I don't know if I would be paying more in interest to the credit card companies paying every month for the duration, which is years paying the minimum, or would I pay more taxes if I withdrew $45,000 to pay off the credit card debt.

This basically depends on three things:

  • What your marginal tax rate is
  • What type of IRA you have (traditional or Roth)
  • How long you will pay on the credit card

Marginal Tax Rate

Given that your income is $100k it is very likely your marginal tax rate is 25% or higher, depending on your family status and state tax rate.

This means for every dollar you have to pay taxes on from your IRA you will immediately owe the government 25% (or more).

What type of IRA is it?

A traditional IRA means you have not paid income taxes on the money. When you make withdrawals, you will be responsible for paying tax on whatever money you withdraw. This will always be at your marginal tax rate.

If the IRA is a Roth IRA, you have no taxes on the IRA when you make withdrawals.

How long will you have the credit card?

The length you will make payments affects which is more. For example, if you pay off the credit card in 12 months with your great income, you will pay at most 13% total interest. It will be less for a few reasons, namely that you said the average interest rate is 13% (so you can pay the higher interest rate cards off first) and that you will be paying the debt off sooner and not have a fully year worth of interest.

In this scenario, you are much better paying the debt off with your income and not paying a considerably higher amount of money in taxes.

But if you plan to have this debt for the next 10 years and pay only minimums? It is probable you will pay more in total interest than you would in taxes, because the interest will happen every year but your taxes only are "hit" once. If you would pay $15k in taxes this year to pay it off but $6k in interest for the next 5 years you may be better off paying it off immediately, if your goal is to minimize your total "loss."

What is the best situation?

Without knowing more of your financial situation (you might have a great pension for $100k/year in a few years or $1,000,000 in rental real estate, some amount of Social Security, etc), it's almost assuredly best to do what other people are saying - reduce your lifestyle and total spending, obliterate this debt, and be debt free in a very short while.

  • Note you will have to pay taxes on the Roth withdrawal if it includes interest income. Probably not relevant in the OP's case given that the withdrawal is less than a quarter of the IRA's value, but this isn't guaranteed, a lot of interest can accrue over 40 or so years. – WetlabStudent Oct 6 '16 at 11:32
4

No. Your retirement is your retirement.

Credit card debt is unsecured--bankruptcy is meant for 'god forbid something happen to me and I can't afford to pay this'. Consult an attorney to understand what's protected in bankruptcy--understand whether or not this is a solution.

The worst case if you take this money out--you pay off the debt, something bad happens--and you end up bankrupt anyway, now you're out an extra x$ + what you had to pay the taxman.

3

Don't. Credit card debt is unsecured, if God forbids you lose your job again and have to declare bankruptcy it will be wiped out.

You need your retirement account for retirement. Assuming this is a traditional IRA, taking out $45k will cost you between $9k(20% tax rate) and $11k(25% tax rate). On top of that you will lose the potential profit from your investment. If we assume 3% per year over 3 years (until retirement), that's roughly another $4k, so total cost is between $12000 and $15000.

Your expenses are $4500 per month, that should leave with with another $1000 for credit card payments. In that case you'll pay off your debt in 62 months (assuming average interest of 13%) and it would cost you $17000 in interest. Obviously that's assuming average interest rate, but you should focus on your high interest debt first, while paying only minimum payment on the rest. This could lower your average rate significantly over time. At 10% average rate, you'll only pay $11k in interest.

So cost wise it's a wash.

I think the best course of action is to budget your expenses and pay as much on the credit cards as possible. Worst comes to worst, you can always use your IRA to pay off the remainder of your debt once you retire and are in a lower tax bracket.

2

You're 63 and it will only become more difficult to find work in years to come. Sadly; the position that you have now may not last very long, that's the reality.

It's probably best to adjust your expenses to what you will earn during retirement now and utilize the excess to bring down you liability. Even if you address the CC debt right now you still have over 2/3 of your income is diverted to expenses that don't include unsecured debt and when you consider the actual amount it may be way more than you afford when you're 66 or 72.

Remember those unsecured accounts won't be kicking you out of your house or repossesing your car. However; cut the fat and live very uncomfortablely it will be painful, but short. Don't pay so much you have to dig back into them and don't pay late, if you have to be late call before the payment is due maybe you can get the fee waived. Set up automatic payments, if it helps you, that reach your goal and fit your budget and pay more if you can.

You will still reserve your savings and prevent a big tax bill at the end of the year. You had to do what you had to do to survive so don't let anyone judge you for it. Now it's time to get back in shape, so when you decide you have had enough with working you will be comfortable and secure.

protected by Dheer Oct 6 '16 at 9:47

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