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Cashing in ROTH IRA to pay off debt

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    Cashing in ROTH IRA to pay off debt

    I am looking for some advice in regards to me and my husband cashing out our Rothís to pay off our credit card debt. These accounts are both secondary retirement accounts since we both have a 401k or TSP account set up through our employers. My husband is 34 and Iím almost 30. I called the bank and they said that as long as we didnít take out the interest that was gained on the accounts then we will not pay any penalties. The amount in both of our accounts would cover both of the credit cards that have the highest balances. We currently have a total of three credit cards. A part of me just wants to take the money out of the IRAís to pay off a large portion of our debt but then another part of me wants the money to remain in our accounts. Iím just not sure which way to go on this. Any advice would be greatly appreciated.

    #2
    Why do you have credit card debt? What have you changed in your lifestyle and spending habits to ensure that you will never again have credit card debt?

    What frequently happens is people cash out an account or take out a home equity loan to pay off debt but don't fix their poor spending habits and before they know it, they are back in debt with the credit card balances run up again.

    I say leave your Roths alone. Pay off your debts by slashing your spending and boosting your income. Otherwise, the next time you rack up debt, you will no longer have the Roths to bail you out.
    Steve

    * Despite the high cost of living, it remains very popular.
    * Why should I pay for my daughter's education when she already knows everything?
    * There are no shortcuts to anywhere worth going.

    Comment


      #3
      I agree with DS. You haven't addressed the real problem. Your credit card debt is not the problem; it is the symptom. You must first understand how you accrued that debt in the first place and figure out how you plan on preventing it from happening again.

      Once you have done this, I would advise that you NOT liquidate your Roth IRAs. The only time I would ever recommend using that money is to avoid bankruptcy. The way I see it, once your money has entered the IRA it is earmarked for retirement and should not be used for anything else. When I put my money away for retirement, I basically forget that I have that money in that account that can be drawn.

      Some critics will tell you that you should pay off the CC debt since it has such a high interest rate. I say no because you have to set yourself up on a plan to pay it off on your own. As DS said, if your debt comes back at a later date, you won't have the IRA to draw from anymore.
      Check out my new website at www.payczech.com !

      Comment


        #4
        Look at it this way. Pretend that the Roth money doesn't exist. How would you go about paying off the credit cards then? Come up with that plan and follow it, even though the Roth money is there. Just ignore it and find another way. Get a second job. Sell stuff. Work overtime. Cut out luxuries. Clip coupons. Whatever it takes.
        Steve

        * Despite the high cost of living, it remains very popular.
        * Why should I pay for my daughter's education when she already knows everything?
        * There are no shortcuts to anywhere worth going.

        Comment


          #5
          Disneysteve & Dczech09, thanks so much for the advice. Yes I must admit that me and my husband have continued to spend even when we knew we did not have the funds available. I know we didn't adjust our spending to suit the different phases in our life. For instance we had twins, moved from CA to FL and bought a house and we did not adjust our spending at all. We use to have at least 20K in our savings with no cc debt and now that savings has been reduced to pretty much nothing and we have about $13k in cc debt. Pitiful I know... I woke up about 2 months ago wondering WTH were we doing. I got so tired of seeing the bills come in and knew that we could not continue down this road. Me and my husband talked and decided that we could not continue to spend the way we do. Our first step was deciding not to charge anything to our cc. All of our cc's are out of our wallet and in a drawer. Now the work starts. We've been paying extra on all our cards but it just isn't going fast enough. We were able to transfer our balances to a interest free card for 18 months. I want to pay them off as soon as possible however living off only want we bring home is life changing. Especially when the cars break down or the HVAC unit needs to be repaired. Looking over our accounts I thought maye it would be a good idea to just take the money from our Roth since it's no penalities and pay off our debt. I just thought it wouldn't be a big deal since its a second retirement account and not our actual 401k's. Thanks so much for your responses. I'm going to wait a little while and do as you suggested and actually reevaluate our debt repayment.

          Comment


            #6
            Originally posted by MC2011 View Post
            We've been paying extra on all our cards but it just isn't going fast enough.
            Here is where the Dave Ramsey plan really shines. Stop paying extra on all of your cards. Pay just the minimum on all but the one with the smallest balance. Put all spare cash toward that one until it is gone. Then move on to the next smallest balance and knock that out.

            While financially it is better to attack the debt with the highest interest rate first, what you need is motivation. Getting rid of a few smaller debts can really help you start seeing that it is possible to get debt free. When you are trying to attack all of the debts at the same time, it is hard to see the progress being made.

            If you'd like, list your debts here with current balance, minimum payments and interest rates.
            Steve

            * Despite the high cost of living, it remains very popular.
            * Why should I pay for my daughter's education when she already knows everything?
            * There are no shortcuts to anywhere worth going.

            Comment


              #7
              Originally posted by disneysteve View Post
              Here is where the Dave Ramsey plan really shines. Stop paying extra on all of your cards. Pay just the minimum on all but the one with the smallest balance. Put all spare cash toward that one until it is gone. Then move on to the next smallest balance and knock that out.

              While financially it is better to attack the debt with the highest interest rate first, what you need is motivation. Getting rid of a few smaller debts can really help you start seeing that it is possible to get debt free. When you are trying to attack all of the debts at the same time, it is hard to see the progress being made.

              If you'd like, list your debts here with current balance, minimum payments and interest rates.

              Disneysteve, what you said makes a lot of sense. We have been concentrating on paying off all of our credit cards at one time which only leaves me a little frustrated and ready to see quick results. Thats why I really thought of using the money from the IRA. Here is a list of our debts. We just recently did balance transfers since it was 0% interest for 18 months.

              Auto loan - $946.00 remaining we are almost done paying for our car, 5.5% interest, min $527
              Citibank - $6,489.00 with 0% interest for 18 months, min payment $97.00
              Citbank - $7,636.00, 0% interest for 18 months, min payment $114.00
              Rooms to Go - $1,700, 0% interest, min payment $90.00

              Comment


                #8
                Originally posted by MC2011 View Post
                Auto loan - $946.00 remaining we are almost done paying for our car, 5.5% interest, min $527
                Citibank - $6,489.00 with 0% interest for 18 months, min payment $97.00
                Citbank - $7,636.00, 0% interest for 18 months, min payment $114.00
                Rooms to Go - $1,700, 0% interest, min payment $90.00
                Great!

                1. Pay off the car. You've only got 2 payments left (unless you have extra to throw at it and can pay it off all at once). That frees up $527/month plus any extra you have available.
                2. Pay the $90 + $527 + any extra to Rooms To Go. That gets that one paid off in 3 months or less. That frees up an additional $90/month.
                3. Pay the $97 + $90 + $527 + any extra to Citibank #1 ($6,489 balance). That will be paid off in 9 months or less and frees up another $97/month.
                4. Pay the $114 + $97 + $90 + $527 + any extra to Citibank #2. That will be paid off in 9 months or less and you'll be DEBT FREE!

                All together, that works out to 23 months if you just pay the minimums. You already said you've been paying extra each month so in reality, you'll be debt free even faster than that depending on how much extra you throw at this. Do you really want to raid your future when you can clean this up in less than 2 years?
                Steve

                * Despite the high cost of living, it remains very popular.
                * Why should I pay for my daughter's education when she already knows everything?
                * There are no shortcuts to anywhere worth going.

                Comment


                  #9
                  I agree with Steve's plan. If you do it, it will change your entire financial life for the better, far more than taking the easy way out that does not build your financial skills.

                  Comment


                    #10
                    Steve, Thanks so much for all your advice! It's like a light bulb came on for us last night. Me and my husband had a long discussion and decided against cashing out our IRA's. We figure we didn't get into this overnight and were not going to take the easy way out. Sadly, I never thought of concentrating on just one bill with the lowest balance. I have only heard of paying off the bill with the highest interest rate. I guess that’s why we've been all over the place with trying to pay off our bills since most of the interest rates are the same. Lol! Right now we're working on budgeting and eliminating wasteful spending to pay off our debt. My husband even thinks we can cut it in 18 months.

                    Comment


                      #11
                      Maat55, Yes I can really see that actually taking responsibility for our spending and not taking the easy way out will definitely build our financial skills. I can see it's already starting because we are taking a even closer look at everything we spend money on and how we can cut the waste. We can only get better from here.

                      Comment


                        #12
                        Originally posted by MC2011 View Post
                        We figure we didn't get into this overnight and were not going to take the easy way out.

                        Right now we're working on budgeting and eliminating wasteful spending to pay off our debt. My husband even thinks we can cut it in 18 months.
                        You absolutely can. You are only looking at 23 months if you just pay the minimums. Knocking a few months off of that by adding extra to the payments is simple. You are already paying extra and if the two of you find more extra money in the budget to throw at this debt, you'll be debt-free before you know it.
                        Steve

                        * Despite the high cost of living, it remains very popular.
                        * Why should I pay for my daughter's education when she already knows everything?
                        * There are no shortcuts to anywhere worth going.

                        Comment

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