I am 61 years old and have about $60,000 in credit card debt. I have about $130,000 in IRA mutual funds. I am also paying off 1st mortgage and a line of credit, so I am gaining equity with those. I am current on everything but am just paying min.s on credit card debt. Does it make sense to take a withdrawal from retirement accounts to pay off that credit card debt. All the cards have a min of 10 % up to 17%. I am not making any headway. Since I am over 59 would I be exempt from the 10% penalty?
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4What are your total CC minimum payments and what is your monthly income?– TTTCommented Mar 20, 2017 at 17:31
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1I don't think the duplicate answer is terribly applicable because of the age indicated in the question and the difference in country.– quidCommented Mar 21, 2017 at 1:45
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1@quid Agreed. Also the difference in debt. Those two questions aren't very similar at all. And this question is specifically asking about the penalty in the U.S., something that isn't addressed in the other question at all.– Ben MillerCommented Mar 21, 2017 at 9:20
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3 Answers
Since I am over 59 would I be exempt from the 10% penalty?
Correct, but you will pay tax on the distribution. Depending on any other income and how much you withdraw, that tax could be as low as 10% or as high as 38%. Since you will pay the tax at some point anyways (unless you leave it as an inheritance), cashing out is one option, but you must also consider the opportunity cost that is lost. You will miss out on any gains that the money would have made in the future.
I am not making any headway.
Then you are either just paying the amount of interest (hard to believe on a 10% minimum monthly payment) or you are still charging to these cards, which mean that you are spending more than you earn. If the latter is the case, then cashing in the IRA is just solving the symptom, not the problem. You will eventually be thousands of dollars in debt again, with no IRA to bail you out.
Stop using credit cards completely. Forget about cash back, miles, rewards, etc. and get on a cash budget. Write down everything you plan to spend for the month, save that amount in cash (you can have some buffer at first since budgeting is not an exact science), and put everything else towards the cards. I prefer the snowball method (paying the smallest balance first) since it reduces your target field more quickly; others prefer paying the highest interest rate first. Unless you have large differences in interest rates and balances the actual dollar difference is usually negligible.
I would consider cashing out the IRAs only as a last resort (avoiding foreclosure) until you can get spending under control.
answered Mar 20, 2017 at 16:53
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I have stopped using charges long ago but I can only afford to pay the mins without going delinquint on something else. I have large school loans which I am paying down as well.– jarvisCommented Mar 20, 2017 at 17:14
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3OK then you should be making some progress, though it may not feel like it. In any case, to make more headway you either need to increase your income or reduce your expenses. If you want to use some IRA money to get a few small ones out of the way that might be OK but be aware of the tax consequences. IRAs are supposed to be for retirement, not paying for activity in the past. Commented Mar 20, 2017 at 18:36
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7He's 61 years old and has 60000 in credit card debt. The mins won't dig him out before the end of his life expectancy.– JoshuaCommented Mar 20, 2017 at 19:16
I ... have about $60,000 in credit card debt. ...paying min.s on credit card debt. I am not making any headway.
Two questions:
1) Why are you only paying the minimum?
2) Why are you not making headway? Even with minimum payments, the balance(s) should be going down.
I will take a stab at #2 first. I feel like you are still using the credit cards to fund your lifestyle. As such, despite making payments, the balances are not going down. Easy solution: Cut up the credit cards and close the accounts. Be done with them, don't open new accounts.
As far as number #1, you need to get on a written budget and use a combination of cutting spending and increasing income to find every dollar you can. Use that money to throw at one of your cards. Concentrate on only one, pay the minimum on the rest. I would advocate choosing the one with the smallest balance, others would advocate choosing the one with the highest interest rate. Whatever, pick one. Pay it off. Then the next. Can you do this in two years? Try your hardest, that would be my goal.
While your IRA balance isn't bad in relation to what the average American has saved, you are kind of in rough shape financially. Your debt is killing you and might preclude you from retiring. If it was me, I would make it a goal to be out of debt as soon as possible. The home equity loan, mortgage, and any car payment has to go.
I would not withdraw from your 401K for two reasons: First you have very little saved. The second is that you have to learn to get out of and stay out of debt.
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I'm spread too thin. I am not using cards anymore but have school loans for my kids and my home equity loan just matured so my payment tripled– jarvisCommented Mar 20, 2017 at 17:34
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9How many hours do you work per week? While it was generous for you to help pay for school for your kids, it seems to be at the detriment to your finances. Can they take them over?– Pete B.Commented Mar 20, 2017 at 17:41
I like to think about things in extreme circumstances and typically weigh the debt repayment priority based on a hypothetical bankruptcy filing. On the liability side you have a mortgage, home equity line, student loans and credit card debt. On the asset side you have the property associated with the mortgage and HELOC and your IRA.
In a bankruptcy the IRS and tax authorities get paid and student loans are very hard to discharge, you're generally stuck with these debts. Your home equity is protected up to a limit that varies by state (some states is 100%) and you can reaffirm the associated debts. Your retirement accounts are also generally protected from creditors up to a limit that far exceeds your stated IRA balance. Your credit card debt can be wiped out completely (by a chapter 7).
To me it doesn't make sense to pay unprotected debt with protected assets. If anything, you should pay the student debt with the retirement assets, because at least both of those are protected. Whether or not that's in fact a good idea is up for debate.
If the interest rates are burying you and you can't make the minimum payments you should probably seek a totally different strategy from wiping out a healthy retirement account.
