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Using IRA to pay off debt


Sailing Jim
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Hello All,

Looking forward to going over the site and researching tools to help me out.  I have a question about using my previous jobs IRA leftover balance to pay down my bad debts.

 

I am fortunant enough to have a good job, have had a good job, but my issue has be the vicious cycle of credit card debt.  Here are my facts:

 

- I currently have just under $50,000 of credit card debt

 

- Im current on all cards, many of which have 0% balances (mostly expiring in 2014, I have been doing the typical, use one balacne transfer offer to move the debts around).

 

- I changed jobs in 2013, previous job had a IRA loan ($32,000 that will end up being reported to IRS this year as a taxable distrabution (of which I have paid no taxes)

 

- Current income puts me in the 28% bracket, this IRA taxable distrabution will bump me up this year to 33% bracket.

 

- I still have $77,000 existing in my old IRA (after 9 years)

 

- New job has afforded much better savings in IRA, after just 10 months, I have already saved $18,000 in new IRA, expecting $20,000 for 2013.

 

Delemia, my bad lifestyle/spending habits have led to a vicious cycle of CC usage and paying off, I find myself using my first paycheck to pay down CCs and debt, using my 2nd paycheck to pay reoccuring bills, and 3rd paycheck to live off (I get paid 3 weeks on, 3 weeks off). 

 

My thoughts, since I know this tax year, I am going to be in the 33% bracket, why not just use all my existing IRA balance, pay off my credit card debt ($49,000), use the extra money in the IRA distrabution to settle any 2013 Tax Debts that I will incur regardless (because of previous IRA loan becoming a Taxable Distrabution).  And wrap up my bad revolving debt this year, once and for all and start anew?

 

My new job pays about 30-50k higher than existing income level, if it werent for my bad previous (albeit ongoing) habits my new income alone would easily handle my cost of living.  But trying to recover from existing spending, maintain current and now jumping up in tax brackets all in 2013 is just too much.

 

Im confident my spending habits will change with a fresh start (they will start by eleminating all but 1 Credit Card, vs 7 i have now)  I am 34 years old, 2 kids (4 & 1) wife doesnt work.  If I can save 20k in one year in new job, I can rebound from my first 9 years of bad finances in 4 more years, I can live amongst my means, I can use extra bonus money to pay down fixed vehicle and student loans faster or just outrighr save as I should have been all along.

 

I know the traditional role of using IRA for debt is bad, but Ive already unfortunantl started the process with a loan in the past, and now that taxable reported distrabution is going to hurt me regardless, is my logic of just ending it all in 1 fiscal year sound and starting over to catch up?

 

Thanks for any and all input, I realize my good fortune, I am thankful for good income and job, I hope now as Im alittle older and see my young children as the true focus of my financial efforts I can start acting like someone who deserves the rewards I have been given.

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If similarly situated I would not do it. I wish I had never done something similar.

 

Some seem to believe Dave Ramsey has a good plan for accelerating debt retirement IDK. There are various debt retirement plans out there and if similarly situated I would seriously be looking into one that others recommend and one that worked for my personality. Not only would that help preserve my retirement nest egg but the discipline should assist me in improving my debt-ish ways in the future.

 

AFAIK my IRAs would have likely been exempt from collectors/judgments when the SHTF financially in my life. Also, I know forums like this can help people survive the wolves at the door. Exempt assets and exempt income combined with knowledge seems to level the playing field a bit for average citizens IMHO.

 

Enjoy your good fortune and leverage it to your family's benefit. Wishing you the best.

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I would definitely get some advice from a reputable tax professional or two before you do anything. I'm not a big fan of doing something that is just going to increase your tax bill plus an extra 10%. If you haven't already STOP putting money into any new retirement plans. It makes no sense to still be adding money if you are planning on pulling it out early. Since you are making so much extra money why not just use that to pay down your credit card bills.

 

It sounds like you have good credit so as long as you can get 0% or low rates keep doing that until you have them paid off. You may need that IRA money in case of an emergency down the road. The only way I would withdraw the money is if you lose your job and need it to pay for your basic bills. Mortgage, Rent, Utilities, Food, etc. Just remember to make sure and pay your taxes before you consider paying any credit cards. 

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Thank you for the insight and replys,  I am using advice to make this decision, but i have to make it rather soon.

 

As of right now, I will be bumped up into the 33% tax bracket for 2013 regardless of rather or not I cash out my IRA.  This is due to the previous loan I had on it at previous job, since I left the old job without paying it off, it is being reported for tax year 2013.

 

I dont expect to be in that bracket again next year (2014) unless I get pinched to do the same thing, becuase once all the 0% deals start ending and payments go up, and interest kicks in, then I will be living pretty thin on paychecks and I will be right back to having to use CC's to extend my time between paychecks.

 

I realize the idea of whiping out 9 years of savings in a sad attempt to make life better now is not a good idea.  My logic is, I can recoup quickly due to having a better job now, I can control spending because I will eleminate all CC's entirely so that the money I have (which would be plenty, having not to have to make payments on CC's or trying to pay them down) and I will have a better peice of mind and calmness in my life.

 

I did not grow up with money, I work in the oil & gas industry where money is flowing rather well right now, my lack of expeirence with high income has hurt as well as help me.  Im finally maturing (or so I hope!!) and want to do this as a "fresh start" kind of thing.

 

But my time is limited, I have a 3 week window get this done coming up and my mind is still not made up.

 

Thanks again, (oh and to clarify, I am NOT putting money into this old IRA, its sitting there all alone).

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Remember that IRA you are cashing out will be taxed @ 43% including the penalty. Unless you absolutely have to do it I would at least wait until next year when you might be in a lower tax bracket. Maybe take out some now and some next year. 

 

Think of it this way:

 

- For every dollar you take out now you will only be getting around 57 cents to pay your credit cards.

 

- Assuming your top tax bracket is 25% next year you will have to make roughly $1.32 just to save a dollar. 

 

- So it will take you earning $1.75 = $1.32 plus the .43 lost in taxes/penalty to get back to the original amount. 

 

I hope I explained that clear enough. Basically you will have to make $1.75 in new money to get back the original $1.00.

(If you are an independent contractor the numbers will be over $1.80+)

 

I understand you may have to withdraw some to pay off the loan, but maybe not to pay the credit cards. I would strongly consider still trying to keep renegotiating with the credit cards until they stop giving you the zero or low interest rates. Remember if you get laid off in the future you may be in the 0% tax bracket. If this happens and you take the money out your tax bill will only be 10%, which is the penalty. Even the penalty might be waived under the right hardship situation.

 

Many in your industry are independent contractors that do not qualify for unemployment. If you are in this situation I would definitely be more cautious. I lost my job a few years ago as an independent contractor and not getting unemployment protection is why I am here. In a worse case scenario if you are forced into BK after losing your job your IRA should be protected. You may lose any money sitting in a regular bank account. I hope this never happens to you, but anything is possible. Since you are working in a bust-boom profession it is very possible.

 

Many here, including me, cashed out retirement savings when things got bad. A lot of us would have done things differently had we known what we now know. You might even consider stretching this out and doing it over a few years. That way you will pay fewer taxes and if things get better you might not have to use the entire amount. Just be careful and think of every possibility before you make the final decision.

 

Good Luck! 

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