Reader Questions Retirement Related

Should I Cash Out My IRA to Pay Debt? – Greg

Due to 2 sequential layoffs, 3 kids in/out of college and “life”, we have amassed about $80k in cc debt, and $180k in college loans. We have no mortgage, wife makes $40k, and we get $12k/yr from a rental house we own free and clear (worth $200k). Primary House is worth $400 k and we own our cars.

I am now 7 mo’s unemployed from a $90 – $105 k career and getting unemployment. Also, I will be the sole heir for about $640 k in cash/trust and a $150 k FL home within a few years as sole parent is in 80’s and in ailing health. The interest and monthly payments are killing us, but on paper we seem to have a lot. Don’t really want to sell rental house in this market eirther. Should I use my $135 k IRA to pay down any of this debt or continue to wait out a new high paying job?

Greg




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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.

2 Comments

  • Hello Greg,

    Given you situation, it may or may not make sense to use the IRA. My primary concern is the uncertainty of your situation and we don’t know how much cash you will need in the bank to make sure you can meet your monthly obligations until you can get employed again.

    My first priority would be to make sure you had enough money in the bank to ride this out. If cashing out your ira to pay off the debts completely wipes out your emergency cash, that would not be a great move. Sure it would free you from about 2,000 in credit card payments going out the door, but that might not be enough to close the monthly shortfall.

    I wouldn’t be able to tell you specifically what I would do in your situation, with the limited information you have provided. I always like to error on the side of caution and I would rather have more cash than I need than try and cut it too close and run out of money before I could replace the income. The good news is that is sounds like overall you will be fine financially. We just need to set you up to ensure that you can ride out this rough patch that you and millions of others are going through right now.

    My gut says you probably shouldn’t use the IRA, or if you did, perhaps look at a settlement option. I don’t know if you have any other liquid savings or what the amount of your monthly cash deficit is, but whatever you do, don’t drain your emergency money to try and fix the temporary cash flow issue, if all it will do is make the monthly deficit smaller and then leave you in a much tougher spot if it takes you longer than expected to find employment.

  • Hello Greg,

    Given you situation, it may or may not make sense to use the IRA. My primary concern is the uncertainty of your situation and we don’t know how much cash you will need in the bank to make sure you can meet your monthly obligations until you can get employed again.

    My first priority would be to make sure you had enough money in the bank to ride this out. If cashing out your ira to pay off the debts completely wipes out your emergency cash, that would not be a great move. Sure it would free you from about 2,000 in credit card payments going out the door, but that might not be enough to close the monthly shortfall.

    I wouldn’t be able to tell you specifically what I would do in your situation, with the limited information you have provided. I always like to error on the side of caution and I would rather have more cash than I need than try and cut it too close and run out of money before I could replace the income. The good news is that is sounds like overall you will be fine financially. We just need to set you up to ensure that you can ride out this rough patch that you and millions of others are going through right now.

    My gut says you probably shouldn’t use the IRA, or if you did, perhaps look at a settlement option. I don’t know if you have any other liquid savings or what the amount of your monthly cash deficit is, but whatever you do, don’t drain your emergency money to try and fix the temporary cash flow issue, if all it will do is make the monthly deficit smaller and then leave you in a much tougher spot if it takes you longer than expected to find employment.

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