debt

Pay credit card debt with retirement fund?

Steve BucciDear Debt Adviser,
I'm 47 and have a retirement fund that's worth $209,000. I also have two credit cards with a total balance of $9,900, interest rates of 8.8 and 11.8 percent, and a combined monthly payment of $200. Should I use my retirement fund to pay my credit card debt? My retirement fund allows me to take out two loans at any given time, and I can get loans for 50 months at 4.25 percent interest.
-- Julie

Dear Julie,
I lean toward Murphy's Law when planning. If something can go wrong, it will, and it'll happen at the worst possible time. So I'd be cautious. You certainly could take out a loan from your retirement fund account, but why would you? The negatives of raiding your retirement fund outweigh the positives.

True, you would pay less on interest charges with the retirement fund loan than your credit cards. But you would lose the compounding interest on the money you borrow. In addition, if you change employers or get fired, your loan would become due in full. In most cases you'd be required to repay that loan 60 days after a change in employment. You could end up losing nearly half of your loan to early withdrawal penalties and taxes on the money you borrowed. You have a great start on your retirement savings. I say leave it alone and let it work for you.

If you continue to make the $200 monthly credit card payments, you will pay off the balances in 65 months. This would be 15 months longer than the proposed 50 months on your retirement loan. However, if you could squeeze just $45 more each month out of your budget, you could pay off the balances in the same 50 months.

Also, you need to commit to not adding to the balances of these credit card accounts. New purchases begin to accrue interest from the day of purchase as long as you carry a balance from month to month. My suggestion is to review your monthly spending plan. You will want to accomplish two things: First, try to find the extra $45 you will need to pay off your balances in 50 months. Second, review your plan to make sure your spending is not exceeding your income.

Believe me: Your retirement account will benefit you more if you save it for later. Plus, making a little sacrifice to pay off your credit balances may be just the incentive you need to keep from doing it again in the future. However, if you lack spending discipline and you're still inclined to borrow from your retirement fund, then I suggest that you try to keep up your contributions to the plan in addition to your loan payment.

Good luck!

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