Which is worse - less savings or more debt?
July 27, 2011 5:44 AM Subscribe
Should I cash out my IRA to significantly reduce my credit card debt?
posted by anonymous to Work & Money (12 answers total) 4 users marked this as a favorite
I have approximately $4800 in an IRA that I contribute $100/month to via automatic withdrawal from my checking account. I set up the IRA a few years ago when I was running my own small business, so it is not tied to my current employer, nor do they contribute to it in any way.
A recent divorce has depleted my savings account to essentially zero, as well as contributed to nearly $7000 in credit card debt. My life has finally stabilized a bit and I am no longer using the cards, but I am having a hard time finding the cash to pay down the credit card balances as quickly as I'd like. This causes me a fair amount of stress.
I am considering cashing out the IRA and putting 100% of the money towards reducing the credit card debt. I know that I would personally feel much more comfortable with an empty IRA and significantly less credit card debt than I do with my current situation, but I admittedly don't know as much about these kinds of things as I should.
1. Is this a terrible idea? I know that common sense is to never dip into a retirement account, but I am in my late 20s and (foolishly?) feel like I have plenty of time to replenish the funds. Also, it seems like it will be more beneficial to me to no longer pay interest on such a high balance than it would to leave the IRA as is.
2. If I do withdraw the money, how much cash in hand am I realistically looking at getting back? I know there is a penalty for premature distribution, and that it will be taxed as well, but I'm unclear on whether or not the entire balance is taxed, or just any amount over my original contribution.
2b. The IRA is not tied to my employment and therefore my $100 monthly contribution has not been taken out of my paycheck pre-tax like many retirement account contributions are - how does this affect the tax question above, if at all?
3. Is there another option I haven't considered that would be a better choice for me? See below for the bigger picture re: my current financial situation.
Obviously, I will talk to the investment advisor who helped me set up the account initially if I do decide to move forward with this, but I'd like to get a feel for whether or not it is a smart choice for me before I get the ball rolling on anything.
Since I'm posting anon, some possibly relevant (and definitely tl;dr) information:
- I am in my late 20s and have steady employment with a very small non-profit (hence the equally small paychecks and barely-there raises). I don't anticipate my income increasing significantly in the next few years, nor my expenses decreasing (I live in an expensive part of the country and unfortunately my salary is not proportional to my cost of living).
- I still own a home in another state with my ex that is worth a decent amount more than we owe on it, but due to the housing market and our incomes, we are not currently able to sell, refinance, or take out a home equity line of credit (we bought the home in 2005, which was obviously an entirely different economic climate than today, and were approved for much more then than we'd get if we were mortgage shopping now).
- I have recently tried (and failed) to get a personal loan from a bank / credit union to pay off the credit card debt. Although I have slightly better than average credit, pay all my bills on time, and could afford the monthly payment -- since it would be a good deal less than the monthly payments to the credit card companies -- I do not qualify because they consider me fully responsible for the mortgage payment (of which I only pay a sliver; the ex takes care of the rest), as well as my own rent and personal monthly bills, and I get slapped with the good old 'excessive obligations' label.
Thanks in advance, MeFites!