“Dear Steve,
I have about 25k in my IRA and about 2k in my 401k. I owe about 11k on credit cards and every month I go more into debt because I make less money then all of my bills. If I were to pay off my credit cards, I would have enough money to live on and wouldn’t need them anymore. I would cut all of my credit cards up. I also own my house. I bought it in 2007 for 200K and put 40k down. I’m only 25 years old and I graduated from college last year, and don’t have any school debt.
Should I take the money out of my IRA and pay off my credit cards?
Sarah”
The Answer:
Dear Sarah,
This is a question I get asked a lot. I understand how you feel you have money at hand that could pay off the debt but the IRA is not a savings account, it is funds you are saving for retirement.
And once you take those funds out you will never be able to get back into the same financial position as if you had left them in. Here’s what I mean. Let’s say you take out $11,000 now plus the money tp pay the 20% tax and 10% penalty on that. If you left the money in you would have enjoyed the growth of those invested funds as the stock market grows. So for you to get your retirement account back into the same financial position you’d have to inject maybe as much as $20,000 within a couple of years to make up for the ground and penalties you lost.
On top of that, you need to see draining the IRA for a short term need for what it is, draining your retirement you’ll need latter. If you could flash forward and speak to your 80 year old self, what do you think she’d say to you as she is worried about not having enough money to last the rest of her life?
Once funds go into creditor protected retirement accounts they need to stay there for their intended purpose. You might want to shift around how they are invested, but NO, do not take the funds out.
So let’s look at the immediate issue. You have $11,000 of credit card debt which gives you about $220 a month in minimum payments. That $220 is more than you can afford and your expenses are more than your income. I would not be surprised if regular and routine expenses have been landing on the credit card in an effort to help you make it through the month. When this happens however, your debt goes into turbo and without intervention the downhill slide gets faster and faster.
So Sarah, how short are you each month from making ends meet? Do you have any money in an emergency fund or saving account?
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