using IRA $$ to pay CC debt

[clutter]

He assures her they have enough for retirement, having saved quite a bit plus pensions from previous jobs. Both he and his wife were laid off from fabulous jobs a couple years ago, which is when they incurred much of the debt. Both are working now and doing okay, but not like before.

I'm going to be the voice of dissent. Not knowing the full situation, of course. But based on the above, it sounds like the debt arose from a period of unemployment. And it sounds like the brother is pretty well set for retirement (he should know better than us!). They are both now working, and perfectly poised to save for retirement again, but have debt from their period of unemployment. In that situation, depending on what my numbers were, I would absolutely consider drawing down some funds from retirement to pay down debt. I imagine that the taxes (which will be paid someday, somehow) plus penalties are probably less than a few years of CC interest. If it was a choice between drawing down IRA, paying debt and maxing retirement savings v. paying debt and doing minimum retirement savings, I'd consider the first. Consider it. None of us know the numbers.

And yes, the OPs mom needs to get over it. But so does the brother. I'm not sure why, knowing that his mom is a bit on the dramatic side, he would share this with her.

 

[Desnik]

I'm going to be the voice of dissent. Not knowing the full situation, of course. But based on the above, it sounds like the debt arose from a period of unemployment. And it sounds like the brother is pretty well set for retirement (he should know better than us!). They are both now working, and perfectly poised to save for retirement again, but have debt from their period of unemployment. In that situation, depending on what my numbers were, I would absolutely consider drawing down some funds from retirement to pay down debt. I imagine that the taxes (which will be paid someday, somehow) plus penalties are probably less than a few years of CC interest. If it was a choice between drawing down IRA, paying debt and maxing retirement savings v. paying debt and doing minimum retirement savings, I'd consider the first. Consider it. None of us know the numbers.

And yes, the OPs mom needs to get over it. But so does the brother. I'm not sure why, knowing that his mom is a bit on the dramatic side, he would share this with her.

I agree with this!

 

[eliza61]

Yes, thats the thing, it will take them years to pay of the CC debt.

I agree with you all and so do my parents. But my mom just called again, crying, because my brother is in *trouble*. Apparently they will be paying for at least 20 some years, in addition to college loans, their own and now also helping put their kids through college.



So if its really going to take them 20+ years to pay if off, do you think they should cash in part of one IRA
(apparently they have many, among other investments)

I probably still would not do it. I look it at it this way. Let's look at the worst case scenerios.

Lets say some thing catastrophic happens and he did not pay off his credit card bill? (and no I never advocate simply walking away from your debt). What would happen? In the worst case, his credit report would be toast and he may have to file bankrupcty.

Now let's say he retires and he has no money. No IRA etc. IMO this is a worst scenerio. Life as an senior citizen having to live off of social security is not some thing that usually has a happy ending.

I totally understand that the above is probably extreme but my general mantra is that I don't touch retirement savings for ANYTHING. While I know a lot of people think they are "set" for retirement just remember, no one in their right mind would have predicted the financial mess we are going through now. No One.

When you mother says he's in "trouble" what does she mean? they don't send people to jail for non payment anymore (except for perhaps the IRS). so as long as he is making payments he's not really in "trouble".

Trouble is being 70 years old and trying to live off of 22000 bucks a year.

 

[eliza61]

I'm going to be the voice of dissent. Not knowing the full situation, of course. But based on the above, it sounds like the debt arose from a period of unemployment. And it sounds like the brother is pretty well set for retirement (he should know better than us!). They are both now working, and perfectly poised to save for retirement again, but have debt from their period of unemployment. In that situation, depending on what my numbers were, I would absolutely consider drawing down some funds from retirement to pay down debt. I imagine that the taxes (which will be paid someday, somehow) plus penalties are probably less than a few years of CC interest. If it was a choice between drawing down IRA, paying debt and maxing retirement savings v. paying debt and doing minimum retirement savings, I'd consider the first. Consider it. None of us know the numbers.

And yes, the OPs mom needs to get over it. But so does the brother. I'm not sure why, knowing that his mom is a bit on the dramatic side, he would share this with her.

Not someday. Most of the time when you take out a withdrawal on your IRA and/or your 401K taxes, penalties all come off the top. so you withdraw 1000 bucks and you end up with a check for 575 because almost a full 43% of it goes to taxes.

My IRA with TD Ameritrade has a 20% penalty and 20% tax right off the top. My company 401K takes a 10% tax and a 20% penalty right off the bat and even what they call hardship withdrawals require the person to "exhaust" all other options before being granted.

They object of these vehicles is to use them for retirement.

 

[mafibisha]

I'm going to be the voice of dissent. Not knowing the full situation, of course. But based on the above, it sounds like the debt arose from a period of unemployment. And it sounds like the brother is pretty well set for retirement (he should know better than us!). They are both now working, and perfectly poised to save for retirement again, but have debt from their period of unemployment. In that situation, depending on what my numbers were, I would absolutely consider drawing down some funds from retirement to pay down debt. I imagine that the taxes (which will be paid someday, somehow) plus penalties are probably less than a few years of CC interest. If it was a choice between drawing down IRA, paying debt and maxing retirement savings v. paying debt and doing minimum retirement savings, I'd consider the first. Consider it. None of us know the numbers.

And yes, the OPs mom needs to get over it. But so does the brother. I'm not sure why, knowing that his mom is a bit on the dramatic side, he would share this with her.

This is basically it. The unemployment both he and his wife (my SIL) endured while also putting 2 kids through college (WITH THEIR KIDS HELP, FWIW As with many families the last few years, it was a struggle to make ends meet at that time WITHOUT touching their IRAs or other assets.

Now however, since they're both working again in stable (although not as lucrative) jobs, they're trying to attack the debt they accrued.

In their long time jobs that were lost, both were able to save quite a bit for retirement in various forms, IRAs being just one. I don't think they intend to cash in the entire IRA either, only about 1/3 of just ONE of his, and not touching anything of hers. (Not sure why, not that it really matters here)

As in any scenario, there are MANY other details in this issue. My brother and mother are really quite *normal* (whatever that is ) in terms of independence and really, while a close family, we're not fused at the hip, nor really is my mom dramatic. When summarizing a situation, it's not always easy to explain everything and again, lots of other details here I could share but aren't really necessary.

Basically, it's always good to get lots of opinions and I LOVE THE DIS where y'all DO know everything Really though, I appreciate the ideas. Like SO MANY threads here, its not easily discussed with friends IRL or extended family, KWIM?

 

[furb & dez]

My brother and mother are really quite *normal*

"Hon, normal ain't nuttin' but a settin' on yo' dryer."

 

[eliza61]

This is basically it. The unemployment both he and his wife (my SIL) endured while also putting 2 kids through college (WITH THEIR KIDS HELP, FWIW As with many families the last few years, it was a struggle to make ends meet at that time WITHOUT touching their IRAs or other assets.

Now however, since they're both working again in stable (although not as lucrative) jobs, they're trying to attack the debt they accrued.

In their long time jobs that were lost, both were able to save quite a bit for retirement in various forms, IRAs being just one. I don't think they intend to cash in the entire IRA either, only about 1/3 of just ONE of his, and not touching anything of hers. (Not sure why, not that it really matters here)

As in any scenario, there are MANY other details in this issue. My brother and mother are really quite *normal* (whatever that is ) in terms of independence and really, while a close family, we're not fused at the hip, nor really is my mom dramatic. When summarizing a situation, it's not always easy to explain everything and again, lots of other details here I could share but aren't really necessary.

Basically, it's always good to get lots of opinions and I LOVE THE DIS where y'all DO know everything Really though, I appreciate the ideas. Like SO MANY threads here, its not easily discussed with friends IRL or extended family, KWIM?

LOL. Normalacy aside, the basic problem (for me anyway) is this.

1) Lets simply look back a few years. Many, many people lost so much money in the stock market crash. I mean very conservative, do the right thing, normal folks suddenly found that all those savings they thought they were set with were now worth 25, 30 even 50% less. Folks who thought they were going to retire suddenly found themselves in a position where they had to continue working.

2) Even if the only withdraw some of the IRA, whatever amount they intend to take is going to get hit and hit big. Depending on the plan adminstration that could be any where between 10 to 50%. So if they took out 1000 bucks are they ready to potentially lose 500 bucks simply to pay off a bill? That's just not smart.

3) IRA's, 401K's all work wonderful due to the magic of compound interest. They will never be able to replace that.

4) they will get taxed on any "earnings" those ira's made and usually taxed at a higher rate?

Can they make up a few scenerios? Encourage them to play on the computer with different "paydown" calculators.

I'm just a big advocate of never touching your retirement funds. You simply

 

[smcabee]

Well long story short, if he can assure he will not get into the same mess again go for it, I was in a similar boat but took a Loan from my 401k to pay off 8k in cc debt with no tax penalties. Yes I lost compound interest, yes I could have had to pay it all back immediately if I lost my job but it was much better to pay myself back then the Credit cards. Every extra dollar I had went to repaying my 401k and it only took me a 2 years to pay it back. Yes I know I could have payed the credit card company back in 2 years as well but the interest rate of 12.5% to the CC vs 4.5% to the 401k loan which came back to me anyway was worth it.

 

[letsgoreds]

Well long story short, if he can assure he will not get into the same mess again go for it, I was in a similar boat but took a Loan from my 401k to pay off 8k in cc debt with no tax penalties. Yes I lost compound interest, yes I could have had to pay it all back immediately if I lost my job but it was much better to pay myself back then the Credit cards. Every extra dollar I had went to repaying my 401k and it only took me a 2 years to pay it back. Yes I know I could have payed the credit card company back in 2 years as well but the interest rate of 12.5% to the CC vs 4.5% to the 401k loan which came back to me anyway was worth it.

$$ is just $$$...like this PP noted, sometimes it is more cost effective to borrow against/cash in the retirement vs. pay the higher interest rate.

I am sooo not a fan of using retirement, pre-retirement, but less of a fan of paying high interest rates on ccards.

 

[eliza61]

$$ is just $$$...like this PP noted, sometimes it is more cost effective to borrow against/cash in the retirement vs. pay the higher interest rate.

I am sooo not a fan of using retirement, pre-retirement, but less of a fan of paying high interest rates on ccards.

A loan and a withdrawal are two different things. Every situation is diffently different but if you did the entire calculation you find that most of the time you are really losing money.
1) 90% of folks who take withdrawals out of their 401k's do not ever repay them back.
2) Unless your cc's are in default (op didn't say) most of the time the interest rate is not going to be 30-50%.
3) my 401K also levies a fee of $150 for taking out the loan. so depending on your interest rates, even after paying yourself back that's still a bite. Then factor in the problem of when you pay yourself back you are paying yourself back with post tax dollars.
So let's say you take out a 5000 401k loan. that original money went in pretaxed now you are paying yourself back with after tax dollars. Now when you retire guess what, you pay taxes on it again. So now that fictional 5K you took out gets hit with taxes out of your paycheck today and bonus: taxed again upon withdrawal when you are in your retirement.

Also remember if you 401K has a modest gain of 7% (right now mine is up 9.5%) and you are losing that on that 5K. That 4.5% you think is such a great rate, you're pretty much losing close to what the original cc rate was. Once again this is assuming that you are not at a default rate of 20-30%.

I'm not a financial advisor, just a gal that reads alot but most people only look at interest rate and forget all about the hidden ways you lose money when you start using your retirement vehicles as piggy banks. There really is a reason why the tax codes and brokerage houses make it hard to use that money.

 

[ilovemk76]

A loan and a withdrawal are two different things. Every situation is diffently different but if you did the entire calculation you find that most of the time you are really losing money.
1) 90% of folks who take withdrawals out of their 401k's do not ever repay them back.
Could you supply a reliable source?

2) Unless your cc's are in default (op didn't say) most of the time the interest rate is not going to be 30-50%.
3) my 401K also levies a fee of $150 for taking out the loan. so depending on your interest rates, even after paying yourself back that's still a bite. Then factor in the problem of when you pay yourself back you are paying yourself back with post tax dollars.
So let's say you take out a 5000 401k loan. that original money went in pretaxed now you are paying yourself back with after tax dollars. Now when you retire guess what, you pay taxes on it again. So now that fictional 5K you took out gets hit with taxes out of your paycheck today and bonus: taxed again upon withdrawal when you are in your retirement.

Also remember if you 401K has a modest gain of 7% (right now mine is up 9.5%) and you are losing that on that 5K. That 4.5% you think is such a great rate, you're pretty much losing close to what the original cc rate was. Once again this is assuming that you are not at a default rate of 20-30%.

I'm not a financial advisor, just a gal that reads alot but most people only look at interest rate and forget all about the hidden ways you lose money when you start using your retirement vehicles as piggy banks. There really is a reason why the tax codes and brokerage houses make it hard to use that money.

This is not true. You took a loan out of a tax free account. You used that tax free money to pay off a CC or other debt that you would normally pay off with your after tax money. You are paying back debt with after tax money either way.

The place you really lose is in the original investment. If the investment was going up you miss all of that gain and the compounding. This can also work the opposite. If you took out money for a loan and then the investment crashed after. When you pay yourself back at the lower rate you are buying low and in the end will be better off. If is almost impossible to know which it will be, so it is best to not gamble with your retirement.

The other problem is the call rule that could be really costly. If you leave your job, be it via unemployment or for another job, the loan could become payable then or you get hit with the early withdrawal and tax problems.

 

[tms295psu]

I'm no expert... but if he pulls from the IRA... Will he have to pay income tax on that???

My dad recently pulled from his 401K (and since he is not retirement age yet). He had to claim that money as income on his taxes this year.

 

[DisneyEater]

I'm no expert... but if he pulls from the IRA... Will he have to pay income tax on that???

My dad recently pulled from his 401K (and since he is not retirement age yet). He had to claim that money as income on his taxes this year.

Correct. If it is not a Roth IRA, he will have to pay taxes when he takes the money out.

 

[mafibisha]

This is not true. You took a loan out of a tax free account. You used that tax free money to pay off a CC or other debt that you would normally pay off with your after tax money. You are paying back debt with after tax money either way.

The place you really lose is in the original investment. If the investment was going up you miss all of that gain and the compounding. This can also work the opposite. If you took out money for a loan and then the investment crashed after. When you pay yourself back at the lower rate you are buying low and in the end will be better off. If is almost impossible to know which it will be, so it is best to not gamble with your retirement.

The other problem is the call rule that could be really costly. If you leave your job, be it via unemployment or for another job, the loan could become payable then or you get hit with the early withdrawal and tax problems.

OP here Y'all are so sweet to keep talking about this.

Its not a Roth IRA or 401K or anything related to either current or past job. Its a separate, additional IRA he has, like hers, that they each both started on their own years ago. They've just been *sitting* on it without contributing, just watching it, saving it for a *rainy day*.

They've decided the tax and fees they'll pay are still less than the interest they'll be paying. . . in just one year. And then another year, and another year.

I'm starting to think I may agree with them and the minority here....

 

[MrsPete]

Folks, try paying off $15k in debt with normal jobs, not high paying jobs. 50% of households make less than $50k. Electric, housing, heating, transportation, food, medical, phone, etc pretty much eat all of the paycheck. Add to that debt payments and when you folks say to cut, you are homeless, without heat, without electric, no car to go to work, suffering with untreated medical conditions, have no clothes, no hygiene, or any combination of the above.

Yes, it's hard to get rid of a debt. The thing is, so many people just don't know how to economize on these things:

- Cut the heat down 4 degrees, delay turning the air conditioner on a couple weeks, then keep it up 4 degrees.
- Most people's grocery bill could be slashed significantly with a little effort. Be sure to eat everything you buy, drink lots of water (from the tap), cut your coffee consumption down, eat more meatless meals . . . the list could go on.
- Cut back to a lesser phone plan.
- Raise your insurance deductibe.
- The biggest single thing you can do to cut down on expenses is to become a one-car family. No, it's not always convenient (but neither is carrying a 15K debt), but it's much more possible than people make it out to be.

Or look at the other direction: Bring in more money. Look for a part-time job. Just yesterday I was offered a two-afternoon a week job doing errands for an elderly person. People ask me to tutor their kids constantly. Sure, most of us like our time off and don't want to spend more hours working, but -- again -- most of us don't like worrying about a 15K debt either.

Don't ever say that a piddly $85 is nothing towards a debt, so you might as well not bother. That's how you get rid of debts: Few of us experience big windfalls of cash. Instead, debts are paid off a little bit at a time.

I've never subscribed to the "Oh, it's useless, so why bother" philosophy. Maybe that's why financial things tend to work out for me.

Well long story short, if he can assure he will not get into the same mess again go for it,

That's a big factor. As so many people have pointed out, this isn't a great idea. BUT if he does it, wipes out the debt, and is DONE . . . it isn't the worst thing in the world. In contrast, if he wipes out the debt and then builds up more . . . well, then he has no IRA and the debt.

 

[dawnball]

My mom just called to say one of my brothers is doing this, so what do y'all think?

If you have enough in IRAs, retirement funds, stocks etc. enough to basically live well in retirement (nothing guaranteed but seeminlgy so), does if make sense to take some of that, say 10-15K to pay off CC debt?

What does the financial model say? If they model their current expenses/repayment schedule vs the withdraw with all taxes/penalties, etc - where's the break-even point for total net worth? Have they figured in a reasonable rate of return on the IRA, and a reasonable rate of return on what they'd do with the money they're currently using to repay debt?

What other options do they have? Could they consolidate onto a lower interest card? Are there "easy" sacrifices they could make that would let them pay the debt off more quickly than they are now?

Are they currently contributing to retirement accounts? Would they continue to contribute to retirement accounts? How are they calculating "enough" retirement?

My husband went to graduate school a couple of years ago, we had some major medical bills, and we chose to temporarily stop (some of) our retirement contributions so we didn't have to take out student loans or economize in ways we didn't want to. Conventional wisdom is to say "Oh, you'll never get those years of contributions back!" but in our particular case, we decided it was the most advantageous of our options.

 

[mafibisha]

What does the financial model say? If they model their current expenses/repayment schedule vs the withdraw with all taxes/penalties, etc - where's the break-even point for total net worth? Have they figured in a reasonable rate of return on the IRA, and a reasonable rate of return on what they'd do with the money they're currently using to repay debt?
What other options do they have? Could they consolidate onto a lower interest card? Are there "easy" sacrifices they could make that would let them pay the debt off more quickly than they are now?

Are they currently contributing to retirement accounts? Would they continue to contribute to retirement accounts? How are they calculating "enough" retirement?

My husband went to graduate school a couple of years ago, we had some major medical bills, and we chose to temporarily stop (some of) our retirement contributions so we didn't have to take out student loans or economize in ways we didn't want to. Conventional wisdom is to say "Oh, you'll never get those years of contributions back!" but in our particular case, we decided it was the most advantageous of our options.

OP here. From what I think you're asking /saying, yes, it will cost them less to pay the fees vs what they'd be paying in interest.

And ITA with you and a few (in the minority) other posters regarding your comment about unconventional wisdom. Sometimes it IS best. With each situation being different with many variables, there's rarely a one-size-fits-all solution.

Thanks again everyone for your ideas. As I said earlier, this is one of the topics not easily discussed with IRL friends or family, plus the wisdom on this board is second to none!

 

[angwill]

Any finanacial guru I have ever heard talk about this sort of thing says you never, ever take from retirement funds.

That said I have an aunt who did it all the time and paid lots of penalties to do it too. Now she is retirement age and upset that she doesn't have more to live off of so she needs to keep working full time to live despite the aches, pains, and health issues she has.

 

[mafibisha]

Any finanacial guru I have ever heard talk about this sort of thing says you never, ever take from retirement funds.

.

I had always heard that too, despite the opposing views posted here that also make alot of sense, too. (again, many scenarios and not a one-size-fits-all solution)

It just occured to me how this can be equated to trips to Disney

Many discussions on the Dis about waiting until you can (fully) *afford* Disney, which can sadly often mean when the kids grow up and aren't available

- VS -

Going to Disney when you can, because no one can really *afford* to wait, since no one is promised tomorrow, IE life goes fast, is short, is tenuous at best.

There have been many examples posted about both, with the latter having the most touching, sad and meaningful IMO. (for example, being happy they didn't wait for a WDW trip because a loved one wouldn't have been able to go had they waited, due to a variety of reasons, including kids growing up, moving away, parents being disabled or even... someone's early unexpected death)

IOW, using (a very small part) of retirement funds may be the solution since no one is even promised a future - or retirement.