Don’t raid IRA to pay off credit card debt

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Dear Debt Adviser,
I am going into the third year of a five-year, debt repayment program with a legitimate company. Yet, I still owe approximately $32,000 in credit card debt. I also owe the IRS $15,000. I am 63 years old and have $235,000 in an IRA. I own two pieces of real estate, one commercial and one a rental home, but each is losing money monthly after taxes and insurance. I want to take enough money from the IRA to repay the balances on the debt and the IRS debt. I have no credit cards and have lived for two years without acquiring new debt. I will be able to add the maximum annually to the IRA if I do the withdrawal. I do not plan on retiring and intend to work (I am an attorney) as long as I live. I am very positive that paying off this debt is the best thing I could do to help resolve the stress I endure for not being debt-free. Your ideas on my plan?
— Lois

Dear Lois,
I have been told that if I want to hear God laugh, what I need to do is make plans. My experience with people whose plan it is to work as long as they live is that they need to make new plans. Injuries, illnesses and life’s curveballs cause many people to have to stop working before they expect. As an attorney you probably don’t have a defined benefit plan. This means that if something happens to you that doesn’t kill you, you will need to live off the $235,000 for the next 20 years or so. It’s a nice cushion, but not nearly enough for a 63-year-old, self-employed lawyer to retire on. I would rather you leave your IRA intact and continue on with your IRS and credit card debt repayment plan. You have obviously made the changes necessary to get your finances under control and are no longer adding to your debt load. Why not just stay the course while continuing to add to you retirement savings? I know you would like to be debt-free, but it took time to get into debt and taking another three years to get out sounds reasonable to me.

Aside from the fact that you are exposing yourself to the risk of an earlier-than-expected forced retirement, another major drawback of removing money from your IRA is the tax burden, particularly if it pushes you into a higher income tax bracket. Not to mention the fact that you would never recover the earning potential of the almost $50,000 you would be withdrawing. You mention that you would be making the maximum annual contribution of $6,000 to your IRA if you made the withdrawal. If you are currently able to make any contribution to your IRA while on your plan, I would rather see you continue to pay down the debt and if necessary make a less-than-the-maximum contribution to your IRA.

You mention two real estate investments, but not if they are mortgaged. If you have equity in either, that might be a source you could draw on to repay your IRS and credit card debt while making reduced payments over a longer period of time secured by the properties. If you have no equity, hopefully your real estate cash flow will turn around soon. Walking away from the commercial or investment properties would entail serious repercussions and I recommend you continue to make up the difference until things improve.

If I were you, I would schedule a visit with a financial planner who will have access to all your financial information. He or she could walk you through what your retirement picture would look like if you went with the plan you are considering of withdrawing money and paying down your debt as opposed to staying on your repayment plan and leaving the IRA intact. Financial planners have great financial calculators and can run several different income and expense scenarios for you to consider. I also believe from what you have told me that you have other opportunities to defer income for retirement. A financial planner will know for sure.

Whatever you decide to do, continue the good work of managing your finances so that you no longer add unwanted debt. And until you build up your savings more, don’t walk under any ladders!

Good luck!

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