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Should I Use My IRA and Tax Money to Pay Down Debt? – Tim

“Dear Steve,

My wife and I have accumulated considerable credit card debt ($70K)while she was out of work for 5 plus years while raising 4 children. I have approx. $120K in a SEP IRA. I am 47 years old and my wife and I combined make approx. $150K per year. I owe $190K on my mortgage, house is worth approx. $275K, but my attempts to refinance have been denied due to the credit card debt. I own a rental property (no mortgage) with a partner … my portion of the equity is approx. $60K. I am hesitant to sell the rental property because I doubt my partner wants to sell and I planned on using the rental income as retirement income … as I currently do not have a pension at work. The credit card companies recently raised the interest rates from 6 to 12% to over 24.99% and our monthly payments have more than doubled … we are at the point now where we are barely getting by making all debt payments and living expenses.

I was considering withdrawing $20K from my SEP and pay $12K of my tax refund for some breathing room and plan to move forward with the snowball payment method to eliminate the debt. Does that sound like the best approach, or should I withdrawal more of the SEP money and get out of debt, then build the SEP back up with the money I’ve been paying in credit cards? Thank you in advance for your help.

Tim”

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The Answer

Dear Tim,

First off, $12,000 tax refund!!!

It sounds to me like you are way overwithholding on your taxes and this is resulting in a big refund. Couldn’t you really use $1,000 in your pocket each month and wouldn’t that make a material difference in your being able to get by?

The goal of taxes is not to used it as a forced savings plan to get a big check. The goal is to come close to not owing money in taxes and using that money each month when you need it most.

How much credit card debt do you have?

Big Hug!

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About Steve Rhode

Steve Rhode
Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.
  • Tim

    We’re partners in an LLC that owns the property, so we’re good there. Thanks for you time and suggestions!

    • http://GetOutOfDebt.org Steve Rhode

      Tim,

      In that case, before you make any decision to tap the IRA, go talk to a local bankruptcy attorney and find out what bankruptcy would mean for you. Those retirement funds are precious and protected from creditors as long as you leave them in there.

      Steve

  • Tim

    Yes, I will increase my W4 exemptions to increase my net pay. I just found myself more disciplined to pay the debt off when I received the big chunk of money. Looking back though, it just seemed like I was paying back what I was “borrowing during the year” and never digging out of the hole! I started reading one of your books and took in “It is what it is” … I’ve definitely reached that point where it’s time to pay the piper, buckle down and make lifestyle changes and get out of this position, so I feel more confident in reducing my annual refund at this point.

    So what do you think about the $20K withdrawal from my SEP to get started? Or should I take more out to knock out a bigger chunk up front? Approx. $3500.00 of the credit card debt is for health expenses (on a Citi health card), so I wouldn’t pay a penalty or taxes on that … right?

    I also have a daughter who is a full time college student, but I don’t really pay out of pocket for that, so I don’t think I could get around SEP withdrawal penalty/taxes with her … grants, NJ529 and student loans cover her tuition. Thanks!

    • http://GetOutOfDebt.org Steve Rhode

      Tim,

      The rental property leaves you really exposed unless it is owned in a corporate name with your partner. So since bankruptcy would not be an option to protect the SEP and eliminate the debt or create an affordable repayment plan based on your income a IRA withdrawal would be a possibility. Don’t forget, you’ll need to take out 30% more than you need to cover taxes and penalties for the withdrawal.

      I’d suggest taking out as little as you can to use with the tax refund money in order to reduce your debt to a more manageable level. That in combination to the additional income you’ll have in your check each month after changing your withholdings will make a big impact for you.

      Steve

  • Tim

    Thanks for the quick response. Sorry, I buried the amount of credit card debt in the first paragraph $75K. I copied my original note below …

    My wife and I have accumulated considerable credit card debt ($70K)while she was out of work for 5 plus years while raising 4 children. I have approx. $120K in a SEP IRA. I am 47 years old and my wife and I combined make approx. $150K per year. I owe $190K on my mortgage, house is worth approx. $275K, but my attempts to refinance have been denied due to the credit card debt. I own a rental property (no mortgage) with a partner … my portion of the equity is approx. $60K. I am hesitant to sell the rental property because I doubt my partner wants to sell and I planned on using the rental income as retirement income … as I currently do not have a pension at work. The credit card companies recently raised the interest rates from 6 to 12% to over 24.99% and our monthly payments have more than doubled … we are at the point now where we are barely getting by making all debt payments and living expenses.

    I was considering withdrawing $20K from my SEP and pay $12K of my tax refund for some breathing room and plan to move forward with the snowball payment method to eliminate the debt. Does that sound like the best approach, or should I withdrawal more of the SEP money and get out of debt, then build the SEP back up with the money I’ve been paying in credit cards? Thank you in advance for your help.

    • http://GetOutOfDebt.org Steve Rhode

      Tim,

      So what about adjusting the withholding to put more money in your pocket to meet your monthly obligations?

      Steve

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