Withdrawal money from Roth to pay off debt?

[bluezombie]

Hello all,

I am 29 years old and need your advice on what I should do. I have been self employed since 2002, but my business has always been a struggle so I have held part time jobs here and there to make ends meet.

Currently I am relying on my business and don't hold a job. My business isn't doing as good as it used to and I am considering closing it down and looking for full time work.

Here is my current situation.

Cash - $2,500
Roth IRA - $13,000
-----------
Credit card #1 - owe $5,000 (16.99%)
Credit card #2 - owe $1,700 (0% for 6 months)
Credit card #3 - owe $1,400 (18.99%)
Credit card #4 - owe $10,000 (16.99%)
Credit card #5 - owe $4,300 (15.99%)

The money that I do make with my business barely gets me buy with paying my rent, utilities, food (all the necessities) but now that my credit cards are starting to charge me finances charges (after the initial intro period) I am a little concerned.

I plan to pay off credit card #3 right away and that would leave me with $1100 cash.

I know in most cases it isn't wise to pull money out from a retirement account, but in this case do you guys think it would be worth it for me to do? From what I understand, I will be charged 10% to pull money out from my Roth. How exactly does that work? Since I have $13,000 in it, will I be charged that fee right away? Also I would then have to pay income tax on it as well, correct?

Any help & advice would be appreciated.

[kv968]

Whether you should pull the money out or not aside, you can take out your contributions to the Roth without paying taxes or a penalty. You'll only be taxed on the gains if there are any.

[jIM_Ohio]

Focus on the income portion of your problem, then focus on your spending... 20k+ of cc debt does not get created overnight.

[swanson719]

KV is correct - everything you put in as principle can be withdrawn, tax and penalty free. It's the gains minus a 10% fee that are taxed as income.

I wouldn't do this for a couple of reasons. First, Getting rid of a retirement account is never a good idea. Second, you have $22,400 in credit card debt with an average interest rate on 4 of them being 17.25%. Even if you draw out the full $13,000 as tax free, penalty free, etc, you're still left with $9,400. Let's say you do knock out the other $1,400 out of your cash. Now you have $1,100 cash and $8,000 debt. No emergency fund, no savings, no safety net should something happen, and you're effectively unemployed.

Basically, you'd be treating the symptoms without fixing the cause. You need to decide to never use credit cards again, not just to pay them off. This is robbing Peter to pay Paul, but you don't express that you never want credit cards again. So why bother taking something that will make money to pay off the cards? Why not get a good full time job, then over the course of say, 18 months, work hard and live light and pay them off? It can be done.

I'd advise cutting up the credit cards, and just paying them off. Pay the 0% interest one first, so you won't have finance charges on it later. Then worry about the ones with higher interest rates. You have to have a change of heart about credit cards in general, and even then I wouldn't advise getting into your Roth.

[jIM_Ohio]

One more point, if you use the retirement accounts to pay off some of the debt (as swanson pointed out) then later declare bankruptcy, you cannot get the 13k back.

If you just declare bankruptcy, the Roth would remain untouched.

[Scanner]

Any help & advice would be appreciated.

Well, you asked for "any advice" so here it is.

The main advice I can offer as a business owner myself is nothing will rob you of money quicker than throwing good money after bad than a floundering business. It's a huge sucking sound, especially if you have staff.

Consider selling or completely abandoning it and don't be emotional about it.

Many successful business owners had failed ventures before making it big on one. In fact, business failure is part of business success.

Good luck. You can withdraw contributions penalty-free but not earnings.

And oh, try to avoid funding future business ventures on credit card debt. . .that's what banks are for. Or so President Obama is lecturing them. I have an unsecured line of credit I use ($24,000 - current balance - $1400) and I can write off the interest. I am not sure if you can even write off consumer debt like that.

[bluezombie]

Thanks for all of your help.

So it is my understanding that if I contributed $4k to my roth and now it's at $13k, if I were to withdraw $4k, there would be no penalty, but if I were to withdraw the full $13k I would take a 10% hit automatically on $9k of it + income tax. BUT if my business were to have a loss for the year, it is possible that I would only take the 10% hit on the 9k (or is it possible that I would pay no penalty if my business had a large enough loss)?

I've learned my lesson with credit cards. I've played the game for many years with balance transfers, so really I have paid little to no interest up until now (minus the balance transfer charge of 3%). I plan on paying them down as fast as possible and will be cutting each one up as I pay it off.

I still have quite a bit of inventory that I could clear out to help pay off some of the cards (~$4,000), it's just a matter of pulling the plug on the business and selling my products at a big discount.

I do have a few other business ideas, but for the time being it is probably best that I seek a full time job and in my free time work slowly on a new business venture.