Push-Pull

OK, long story very short....I have a credit card that has a $3000 balance, and $350/month payment. It is *really* starting to hurt us as our situation has changed. I am thinking about taking the money out of my IRA to pay this damn thing off so we can stop worrying about paying it on time every month.

My question is...How does the money from my IRA get taxed when I take it out?
I know (think?) there is a 10% penalty and that the amount I took also gets added to my income for the year unless I put it back in full within 60 days. Is this correct?

I know that it would only take 11 months or so to pay it off, but we honestly cannot go that long at $350/month. I am also not in a position to borrow it from a freind/relative, nor do I want to take out a small loan for credit report reasons. (That is to say, I could get one easily enough, but we've got a large purchase coming up and don't want the extra burden on my report.)

On the upside, I just started a new job that has lots of retirement options (401, stock, etc) and will be adding funds to my retirement through that much faster than I have in the past.

Thoughts?

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braisler

The very first thing that you should do is to call the credit card company and get your interest rate reduced or eliminated. It is not hard to get it cut in half or more. If you work at it, you can get it reduced to zero. That should cut your payment substantially. You must do this first. Start with the first customer service person you talk to. Explain that you are paying down your balance but the interest rate is simply too high. You have another offer from a competing credit card that will give you 0% interest on balance transfers for the next 6 months if you switch to them (there are lots of offers like this out there, you don't have to actually have one in hand). Ask if they can match this rate. Then wait. Usually the first CSR you talk to won't have the authority to lower your rate, or at least not substantially. You will probably have to go through the whole story with their supervisor.

Don't threaten to close the account, just stress that you want to pay the amount off, but have a better interest rate offer elsewhere. Whatever, you do, don't close the account before you have it paid off. This goes directly to collections and there is no more negotiation.

For the IRA issue, depending on the amount that you have in the IRA currently, you may be able to get a loan on the balance which is lower interest rate than your credit cards. If you cash it out (bad idea, maybe the worst, last resort) you will have the 10% fee and then have to deal with it as income just like you said.

A $3000 balance is really not all that bad. You started your new job, so hopefully you've got a good income coming in. Take a good long look at your finances and cut out the 'extras' that you may not really need. Cancel your (and your partners?) cell phones if you can. Do you REALLY need them? Probably not. That alone can be 700-1000 per year. What about cable television? That is another 'essential' that you can really do without pretty easily. In most areas, that's another $600-700 per year. Look around at what you spend your money on and what can be cut down for the few months it takes to get this debt paid off.

Best of luck resolving this for yourself and your family.

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You do not really understand something unless you can explain it to your grandmother.
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Amano

What kind of IRA is it? My understanding is that if it's a Roth IRA, you can take out the principal without penalty at any time. For example, let's say you had 10000 that you put in over a period of several years, from which you've earned 2000 in interest (so 12000 total). I'm pretty sure you can take out up to 10000 without early-withdrawal penalty.

Can someone confirm this?

Supple Cow

I think it has to be for a qualified expense such as purchasing a home to be able to that.

gar1976

In most cases you can take out the original contributions to roth's without penalty (exceptions apply to converted IRA funds). Original money first, then earnings, which are subject to a 10% penalty if under 59 1/2 and certain exceptions do not apply (and income taxes even if you meet said exceptions).

For original poster - you'll lose around 35 - 50% of your IRA withdrawal for taxes to pay down consumer debt. Might be better to find another way.

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robot_parade

Yeah, I agree with the others - withdraw from the IRA as a last resort - if you're paying into it monthly, perhaps you could reduce the payment amount for a few months, but withdrawing from it is a bad idea. I don't know the specifics of the penalties, though...

thingstodo

Is the minimum payment on a $3K balance really $350/month or is that just to pay it off quickly? Paying less usually means your primarily just paying the vig. Costs you more in the long run but much less expensive than taking from your IRA I would think.

Can you find another card offering no interest on balance transfers? You could probably get that payment under $200/month or less going that route.

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