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I would appreciate some advice.

I currently have a good paying job that I am contributing to a retirement account.

I had a retirement account at a previous job and when I move here my current position uses a different company to service my current retirement from my previous job. Therefore, the current company helped me roll over what I had accrued in retirement from my previous employer into a new IRA that is NOT linked to my current retirement. So this rolled over IRA has $30,000 sitting there with no further contributions.

My wife now stays at home with our 3 children and has no income. She had a teachers retirement plan at our previous location and that money is literally just sitting there (~$10,000).

We have significant student loan debt and $16,000 in credit card debt from our graduate school days.

We currently pay ~$850/month to credit cards but with the student loan debt and a new mortgage we seem to be in over our heads. We start to make a dent then something happens like car repairs (I have a 10 yr old car that I have no payments on). We just can't get ahead.

What would be the penalty to withdraw the entire teachers fund, $10,000? We are in the 25% tax bracket. Would it be 35% penalty so net would be $6,500 that we could apply toward CC debt?

Then would I be able to withdraw the rest from my IRA that is sitting there to pay off the rest? Would is be as simple as taking $15,000 out (assuming 35% of tax + penalty) to pay the remaining $10,000?

I know this would essentially be paying 35% interest to pay off credit cards.

The pros to us are start fresh. That $850 can now go into saving for a rainy day fund or to help make ends meet each month. We could wash our hands of credit cards. We could then focus on our student loan debt next.

Cons are on obviously paying essentially $9k fee to pay off $16k debt. However, this money is really essentially unusable for us. We are both 25 years from being able to withdraw from it with no penalty. And we have my new retirement account that is being contributed toward monthly and growing well. I could also increase my contribution to that retirement.

So, long story short. Is it as simple as expecting a 35% penalty on any withdrawal? Would we be expected to pay that tax burden immediately to the IRS or report the withdrawal as income and pay the $9k at tax time?

Just trying to get out options straight.

Cheers!

  • Is this Traditional IRA or Roth IRA? – user102008 Dec 16 '17 at 1:48
  • Traditional IRA. – Dflaher Dec 16 '17 at 2:18
  • What is the teachers' fund? Is it an IRA, a 403(b), a state retirement fund (which state?), or something else? – Ben Miller Dec 16 '17 at 4:44
  • KPERS. Kansas Public Employee retirement system. Says it is a dedicated fiduciary? – Dflaher Dec 16 '17 at 4:48
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    How much are you currently putting into retirement? – Ben Miller Dec 16 '17 at 5:57
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To answer the title question, the penalty is 10% on early pre-tax withdrawls though there are a handful of penalty-free scenarios detailed in common IRS publications. Loss of a job (your wife perhaps) might be one of them.

However ...

Nowadays CCs are regularly offering 0% interest for well over a year (21 months Citi Simplicity/Diamond) on balance tranfers with a 3% fee. So you should not be paying more than about 2% interest on your $16k debt. Your IRA investments are likely earning much higher (TIAA Traditional is no risk 3% guaranteed plus extra % depending).

With the Citi example of 21 months, you have 21 months at 0% to pay off $16,000 + $480 BT fee, which is 21 payments of $785.

But really, you should split that $785. Pay ONLY the minimum due each month to the CC, then put the balance into a high-yield checking account. For example Advantis Credit Union is offering 1.75% APY on their no-risk no-fee Fusion accounts. After 21 months, you'll have have set aside the lump sum that will be due on the CC when the 0% period ends, plus have earned a few hundred dollars in interest on the Fusion account.

By the way, that Citi offer is also 0% on purchases for first 21 months, which is how you can smooth out an occasional expense such as a car repair.

Lastly, look into rolling over your wife's $10k traditional IRA into a Roth IRA, which might be a good deal if she can file separately at 0% tax rate.

  • OP might not have the credit score to get 0% BT offers. (I agree, though, that they are the way to go. Were a big help when we clawed out of much more CC debt.) – RonJohn Dec 16 '17 at 7:31
  • That was long before my CC problems. – RonJohn Dec 16 '17 at 7:40
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Yes. That's the cost. 10% is the penalty, and if you are in the 25% bracket, that's the tax. 35% total.

The thing that concerns me is you are considering "spending" $25K to kill a $16K debt which costs you $850/mo. 850 * 18 = $15,300. At the same time, you said you'd use the money to deposit to a rainy day fund. Can you find any way to get through these 18 months (and a few more with interest)?

If not, at least wait till January, to see the impact of tax reform. You might see a couple hundred dollars/mo extra.

  • Thank you for the info. We haven't made any decisions. Just gathering information. This isn't going to be acted upon immediately or probably at all. – Dflaher Dec 16 '17 at 12:36
  • Would the new tax plan that is going to be passed effect our 2017 tax filing? I was wondering about that. – Dflaher Dec 16 '17 at 12:37
  • Not significantly. But, the 2018 marginal rate might be lower and even a couple % is worth waiting 2 weeks. – JoeTaxpayer Dec 16 '17 at 18:19

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