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We Have Great Credit But Want to Take Money From IRAs to Pay Down Debt. – Doris

“Dear Steve,

48 year old female, married, 1 child 14 years olds in 9th grade – college bound.

11 years at job with vested pension, Roth and traditional IRA’s,

home owner – 174,000.00 at 6% (fixed VA) monthly payment with taxes and insurance – 1507.00,

800 credit scores, 2 cars financed at 2.5% totaling – $40,000.00,

16 years before retirement,

Net worth 195,000.00.

Monthly income – 5663.00.

1 credit card balance at $4,420.78 / 7.9% (prime 4.65%).

1,000.00 savings.

Food bill slashed in 1/2, electric bill at min. Cell phones at 191.00 per month – cancelation fees would be: xxx-xxx-692 – 07/19/2013 – $150; xxx-xxx-9829 08/25/2014; $155 xxx-xxx-0013 09/24/2013 $200.

Family on strict budget with all unnecessary spending stopped as of 01/01/13. Everyone is on board for paying down debt. In the last month we tried to refinance to a lower rate but were denied because of the cars

- Should I use my roth IRA to pay off the balace on my cc and use the cc payments to snowball cars until paid?

- When should we try again to refiance to a 15 or 20 year loan?

Thanks for your help!

Doris”

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The Answer

Dear Doris,

Here is the issue with borrowing from retirement plans that people miss, while the rate to repay is low, you lose the power of the invested funds while they are out of the account.

For a detailed example, see Here’s Why a 401(k) Loan to Pay Off Debt Can Cost You a Massive Amount in Retirement

You only have $1,000 in savings and things are clearly tight, but you have good credit and making the minimum payments. You are in the creditor sweet spot, low risk, good returns.

From my point of view, the attraction of stealing money from your retirement to pay down consumer debt is not wise. Really what you are doing is robbing your future higher balance, when you will need the money the most, to deal with consumer debt now.

I’d really like to see you adding to your savings account by several hundred dollars a month.

Is that monthly income your combined family income or just yours?

What is your goal here, to be in a better situation to deal with college debt or to put preparing for that aside and dig out of the current debt?

Please post your responses and follow-up messages to me on this in the comments section below.

Big Hug!

We Have Great Credit But Want to Take Money From IRAs to Pay Down Debt.   Doris
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We Have Great Credit But Want to Take Money From IRAs to Pay Down Debt. - Doris by

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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.
  • http://www.avoidbk.com/ Jared Strauss

    Hi Doris,

    I don’t know how possible this will be for you as it will be dependent on the LTV you qualify for when you refinance. But, this could be a potential option…

    Call a mortgage broker and find out what you would qualify for in the scenario of the cars being paid off. As you alluded to, your problem is your debt to income ratio and the recency of the loans.

    If the mortgage broker is 10,000% confident that they can lend enough to you to repay your traditional IRA, you could take out a short term loan without penalty or tax exposure and pay off the vehicles, then refinance and cash out the amount you borrowed from the IRA and pay it back.

    You will need near 100% financing to have enough. 100% financing is generally a horrible idea. You more than likely will have to come out of pocket to cover realtor expenses if you sold prior to gaining any appreciation.

    However, in your situation, if you don’t plan on moving any time soon, it may make sense due to the impact it would have on your monthly finances.

    I’m assuming your car payments are in the $800 a month range? Between that and the difference in interest (figured 4%) on your new loan you would save approximately $1,000 a month.

    And if you wanted to pay off your mortgage in 15 years (figured 4%), you would save approximately $400 a month.

    If you decide to go forward with this strategy you must make 100% certain that the terms of the loan won’t change. So get your approvals in writing. As you don’t want to take out the loan and pay off the cars and then have the terms change on you. Just be very, very careful.

  • http://www.avoidbk.com/ Jared Strauss

    Hi Doris, I’m trying to piece your situation together. You were very detailed with your information, but i need a few more pieces.

    What is the value of your home?

    How does your mortgage payment break down? (payment/insurance/taxes)

    How many years are left on your mortgage?

    What is the balance in your Roth?

    What is the balance in your Traditional?

    • Doris

      Value of home is 220,000.00

      Payment – 1507.43, Principal – 367.96, Interest – 863.53, escrow 275.94
      Roth – 10,000.00
      IRA – 80,000.00

      • doris

        Left on mortgage – 172,338.23

      • Doris

        sorry forgot to add we have 20 years left on mortgage.

  • Doris

    Steve thanks for taking the time to help out. I am paying 150.00 to 300.00 on credit card per month (above min) (I also plan to use any tax refund towards cc and cars if anything is left over after cc). I have budgeted $300.00 for savings per month as well, $100.00 for miscellaneous bills that may pop up and $200.00 for household spending per payday (twice a month) (this is after all bills i.e. food, gas for work etc.). After I wrote you, I realized I can have my cc paid off in about 8 months without struggling. Other than the cars, house, and 1 cc we don’t have any other debt and we live very simply. So I have some wiggle room. I have put college savings on hold to take care of debt right now. My daughter is bright with a 4.0 gpa that she has carried throughout all school years…we will apply for grants to supplement college. Since the IRA question was answered, I would still like to know when we should try to re-apply for a refinance loan. We were just denied this month. I don’t want to lower our credit score by apply too soon. By the way that was combined income from both us.

    • http://GetOutOfDebt.org Steve Rhode

      You might want to look at the free service offered by ReadyForZero.com to help prioritize and organize your rapid debt repayment.

      Regarding the future loan opportunities, you should take a look at your credit score, may be free from CreditKarma.com and look at the score calculator to see what is bringing your score down.

      Additionally, I would strongly suggest you find a local mortgage broker you like and talk openly with them about your goals and current status. They will help you get in shape to be approved.

      Keep me posted.

      • Doris

        Our scores are not the problem; we are in the high 800′s. We were told by the lender that we were denied because of our car balances, and the car accounts are too new and we applied for credit in a short amount of time compared to applying for the home loan. We bought the cars August of
        2012 what I am wondering is how soon can we reapply or how long should we wait to reapply so that we do not risk lowering our credit scores by apply again.

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