I’m 24 years old an currently have a Simple IRA worth about $5000
When I built my business some unexpected expenses were put on credit cards which now total about $4500.
Would it be wise at this point in my life to take the $5000 out of my IRA which I think would yield a 25% penalty and use it to completely pay off the cards?
If it makes a difference, I am employed part time, and work full time at my own store.
I have a mortgage that is over $40K and student loans totaling about $20k
Depends on the interest rate on the credit card debt. If it is more than 25%, it makes sense to cash out the IRA and pay it off. But is the interest on the credit card is 10-15%, it doesn’t make sense to me.
No. That 25% penalty is going to cancel out any interest savings on that debt. I would make paying it off a priority though. Go without cable and eating out for a year and you’ll have pretty much paid it off. Don’t throw your retirement savings away on a year of bad TV and disappointing restaurant meals. (Substitute cable and restaurants with whatever discretionary spending you feel is appropriate to your specific lifestyle.)
Interest on both cards is 22.6%…or within a couple tenths of a percent.
Best strategy is to increase business revenues so you can use that cash flow to pay off the debt.
Barring that, you may wish to make lifestyle changes as suggested by DrCube to pay off debt.
If you can’t do that, stop contributing to the IRA until the debt is paid off. It doesn’t make sense to put cash to work earning 6% (assuming) while you could put the same cash into reducing the 22.6% interest charges.
If you’ve got a good credit rating, see if the credit cards will lower your percentage (you threaten to close the account).
Or, you may want to borrow money from somewhere else to pay off the cards - if you’re confident you can lay off the cards so you don’t build up another $4500.
Even peer-to-peer lending rates (which aren’t amazing, from the borrower’s point of view) are a lot better than 22.6%, if your credit rating is good.
Then you are losing money by paying them off. But the penalty for early withdrawal from an IRA is only 10%, the rest is income tax. Eventually, you are going to have to pay that anyway, although perhaps at a slightly lower rate when you are 59+ years old. The math says pay off the credit cards, then replenish the IRA with the money you would have paid monthly on the credit cards.
Yes, I have not touched the cards in about 8 months, and I don’t need them, it was pretty much a “do or die” situation when they were used
Don’t take anything out of your IRA to pay off your card. Just pay off the $4500 as quick as you can, but try to get your rate lowered, or find a card with a lower rate & transfer the balance.
Your loss would be 10% + your tax rate + whatever interest it would have earned this year. That is almost certainly more than 22%.
But you have to pay the tax, no matter when you withdraw it. If you are retired, your tax rate may be a little lower, but the tax bite is still there, whether to take it now or 30 years from now.
Oh, okay. If you want to play that game, I’ll count every single years worth of interest between now and retirement as a loss in this calculation.
There isn’t a financial advisor on the planet who would even let him consider such a stupid move. Not one.
Financial advisers have a vested interest in keeping your money in an IRA. Anyone who can do math can decide whether it is a good idea. A blanket statement like “Never withdraw from your IRA!” isn’t helpful. If you have a high interest credit card, it can be in your financial interest to pay it off from an IRA. It would be better not to incur a high interest debt in the first place, but that is not what we are discussing.
Not all financial asvisors do, no. Especially over $5000. That’s ridiculous. And personal finance is 75% behavior and 25% math. That’s why so many people get into trouble. And, quite frankly, anyone who neglects to take into consideration 30 years of lost compound interest doesn’t need to be talking about how easy it is for the average person on the street to just do the math and figure it out for themselves.
Go online and see how many places you can find that would advise someone to take money out of an IRA to pay off $4500 in credit card debt. You won’t, because it’s a terrible idea.
Go back and read my post again. I suggested they replenish the IRA with the payments they would have made to the credit card. The difference between the money they save by not accruing high interest credit card charges, and the lost relatively low rate of compound interest on an IRA more than justifies paying it off.
You’re still wrong. He would lose 30 years worth of interest on the interest he would have earned this year.
Which is more than offset by the interest he didn’t pay on the credit card, plus the interest on that when it is reinvested in his IRA. The interest on the credit card is much higher than the rate of return on the IRA.
No it isn’t.
If you are earning 22.6% annually on your IRA, please tell me who you are with, and I will transfer my accounts today.
I do this all day every day practically. People often make the commitment to pay themselves back and rarely do so. It’s just not worth the risk.
Here’s some basic advice:
Don’t touch your IRA. The projected value of the $5000 when you retire is enormous. Truly enormous.
Contact your credit card company. Just say you’ll leave if they don’t lower the rate. Either they’ll do so or not.
If they don’t, head to a local credit union (most any will do) and join. Then ask them for their own low-interest CC and say you want to transfer a balance. Some helpful person (who gets a bonus for setting up credit card accounts) will do everything except sign your name on the dotted line.
Pay at least $100 over the minimum balance each month to retire the debt. You’ll be amazed how quickly it goes away. Don’t run it up again.
You aren’t doing the math correctly. Which is why there is nobody anywhere who agrees with you.