Best way to reduce my CC Debt - use our IRA?

[DJP0910]

Hi all, this is my first hope and hoping to get some advice...

I am married, 40 yrs old with 2 kids, 9 and 6. Trying to find ways to save but have a good amount of CC debt. Here is the breakdown:
CC-1 (21.90%) - $599.55
CC-2 (15.24%) - $1,392.77
CC-3 (10.24%) - $5,422.48
CC-4 (0.00% until May'13) - $6,530.00
CC-4 (7.24%) - $7,341.41

We are pretty much living month to month and able to put ~$1,250 a month to the CC debt listed above. At the end of the month, we really don't have any savings at all and can only put ~$50 a month to college funds. (We are no longer using the CCs, obviously.)

I have about $90k in an IRA and my wife has about $10k in hers.

Does it make ANY sense to dip into those retirement funds to pay off the debt and start over? That will free up close to $1500 a month for us to put toward savings, college funds, home improvements (which we desperately need) etc...

The option is to chip away and be out of it in a few years.

Your thoughts are appreciated.

[greenskeeper]

do you have any equity in your house? you could HELOC the credit debt and get a lower interest rate, plus interest is tax deductible.

Dipping in the IRA has tax penalties attached to it.

[DJP0910]

do you have any equity in your house? you could HELOC the credit debt and get a lower interest rate, plus interest is tax deductible.

Dipping in the IRA has tax penalties attached to it.

Thanks for the reply. Have a HELOC and can't consolidate cards into it. That is a a monthly expense we are also chipping away at and are OK with paying. Our focus at the moment, though, is the CC debt. Now that we are "wiser" (hopefully) financially and understand how and what it means to live within our means, we want to get rid of it the smartest way possible and move forward. Obviously, we want to do it the quickest way possible but want to be smart about it, as well...

[Hector]

I would stop contributing to kids college fund.
Kids can take loan and go to school, but you wont have many choices if you wont have enough in retirement.
You should also think about looking for higher paying job and/or side job to increase income.

IMO priorities should be in following order:
1. pay of debts
2. save enough for retirement
2. save for kids college

I would focus on paying CC debts.

[DJP0910]

I would stop contributing to kids college fund.
Kids can take loan and go to school, but you wont have many choices if you wont have enough in retirement.
You should also think about looking for higher paying job and/or side job to increase income.

IMO priorities should be in following order:
1. pay of debts
2. save enough for retirement
2. save for kids college

I would focus on paying CC debts.

Thanks, Hector. Our focus without a doubt is paying off the CC debts and that is where everything is going toward.

My question is if it makes any financial sense to dip into our IRAs to pay it off sooner rather than later? Having the CC debt gone lifts a huge burden off our shoulders and would allow us to institute some actual financial planning...It is the first step and I want to investigate all options to complete that first step ASAP.

Thanks again.

[greenskeeper]

Thanks for the reply. Have a HELOC and can't consolidate cards into it. That is a a monthly expense we are also chipping away at and are OK with paying. Our focus at the moment, though, is the CC debt. Now that we are "wiser" (hopefully) financially and understand how and what it means to live within our means, we want to get rid of it the smartest way possible and move forward. Obviously, we want to do it the quickest way possible but want to be smart about it, as well...

my rough calculation is that you should have your CC paid off in 17 months if you throw $1250/month at them.

If this is correct, that's not much time at all. As mentioned, if you can stop college fund savings and other expenses and throw as much as possible at the CC, you'll be out in no time.

[DJP0910]

my rough calculation is that you should have your CC paid off in 17 months if you throw $1250/month at them.

If this is correct, that's not much time at all. As mentioned, if you can stop college fund savings and other expenses and throw as much as possible at the CC, you'll be out in no time.

Thanks again for the reply...taking interest into account, I see my payments going out to 2014, mainly for the one with the largest amount...

What is the tax hit / penalty etc. for taking out of your IRA?

[bjl584]

You're not going to get much support for using your retirement funds to pay off debt on these boards. There are good reasons not to do it such as the taxes and penalties, and the possible jeapordization of your retirement.

It's harder but much wiser to dig yourself out of your hole without the assistance of your IRA. If it is feasible, I would start to sell some of the items that you bought with the credit cards to help pay down the balances.

If you're never heard of Dave Ramsey or the debt snowball method, then here is a link:

Dave Ramsey Homepage - daveramsey.com

[bjl584]

Thanks again for the reply...taking interest into account, I see my payments going out to 2014, mainly for the one with the largest amount...

What is the tax hit / penalty etc. for taking out of your IRA?

Early Distribution of IRA, 401K & Other Retirement Accounts - Penalty on Early Distributions

[Bob B.]

I agree with greenskeeper, although I came up with 18 months, as long as you keep up with the $1,250 a month payments.

BTW, I'm in the same situationas you are. I've been chipping away for a year. It doesn't get easier, but it does get more rewarding as the dollars going to principal each month decreases, and the dollars going to interest decreases.

[Hector]

IMO withdrawing money from retirement account to pay off debit card is bead idea.

In addition of financially, I don't think psychologically it makes sense either. you are into the hole and right thing would be is to reduce your expenses and/or increase your income and pay off all the debts. That will teach you to be discipline and you will be better in making financial decision in future. If you pay it from your retirement account, in addition of paying penalties, you would not learn an important lesson of being discipline.

[MonkeyMama]

Federal Penalty on IRA withdrawal is 10%. There may also be a penalty from your state. + Taxes (at your marginal tax rate). In California, this can EASILY add up to 45% tax/penalties on a middle income person. So, you have to withdraw almost $40k to pay off $20k. OUCH!

My state may be a worst case scenario, but no matter what state you are in, it is not pretty. Makes the credit card interest rates look like nothing.

Are you currently contributing to IRAs or retirement funds? I would absolutely stop retirement contributions for 1-2 years to dig out of debt. That is also not the best scenario, but works out to be a much better plan.

I'd forget college savings.

Increase income as much as possible, decrease any expenses possible - this is the most effective way to do tackle the debt.

[kork13]

How many ways can it be said... Withdrawing from the Roth is NOT a good plan.

Forget college savings for now... your kids will be just fine with grants, scholarships, and student loans. Don't sacrifice your retirement (there's no loans for retirement!!) in order to send your kids to school.

If you've got $1250/mo to pay down your debt, you can wipe out your two worst (interest rate) cards in just 2 months! The next one in just 4-5 months after that! Pay the minimums on your lower-rate cards while you knock out the high-rate cards. In 6-7 months, you'll be down to just 2 cards, one of which isn't charging any interest for the following 12 months. Look at this step by step, and you're really not in so terrible a position. Just take one card at a time, knock it out, and move to the next. You'll be out of this in no time, and your retirement funds will still be perfectly intact.

[maat55]

My first option would be to find extra work, stop contributions to college funds and retirement funds, cut living expenses to the bone and sell things. Once that was exausted I would only use contributions from a Roth. I would not use 401k or traditional IRA funds.

You really need to do this while experiencing some massive spending cuts in lifestyle. You will not become immune to over-spending until you detox from it. I am a firm believer that good personal finance is a behavoir issue and not a numbers issue.

[snafu]

You acknowledge some decisions you've made in the past weren't in your best interests long term. Excellent advice has been offered although not the response you wanted to hear. I hope you understand that we offer suggestions because we genuinely wish to be helpful not hurtful. You damage your family when you spend more than you can afford because interest paid offers them no benefits. Retirement investment benefits from long term accumulation. You will need those funds as a senior as it's not our culture to have our children responsible for us when we're elderly.

Add up the interest part of your CCs, HELOC, Mortgage, Loans for December and multiply that sum by 12 to give you annual approximate. Could those monies have funded the home improvements you need? I hope you'll work through the methods offered, wishing you well.