Author Topic: Roth IRA withdrawal to pay off stubborn credit card debt?  (Read 6738 times)

financialnewb

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Roth IRA withdrawal to pay off stubborn credit card debt?
« on: February 27, 2014, 09:46:20 AM »
5 years ago, my husband and I made the decision for him to go back to school.  We lived like paupers with our two children and moved to a different state for a job upon graduation.  We incurred about $7,500 in credit card debt from the move (20% interest), since it was somewhat unexpected and we just didn't have the cash to pay for first and last month's rent, deposit, and travel to our new place.  We planned on using this year's tax return money to pay it off in full, but Murphy had different ideas for us (as always) and that money was quickly gobbled up by a surprise surgery for our third child (5 months) and a hospitalization for my husband.  We feel like we're throwing away our monthly rent and our goal is to get ourselves in a position to buy a house in a few years, so I don't want any bills going to collections.

Meanwhile, our credit card debt is demanding $150/month in interest alone.  While in school, we managed to stash away $10,000 in a Roth IRA, which is now sitting at about $14,000.  As I understand it, I could withdraw the contributions penalty-free, just not the earnings?  We haven't touched it thus far because compound interest is my favorite, but I'm beginning to think that we would be better off just getting rid of the credit card debt so we could actually start gaining some traction?  I recently applied and got approved for a different credit card with 0% interest until June 2015 with no balance transfer fee (limit of $2,500).  The debt is spread over two cards currently (5,000 on one and 2,500 on another).  I was planning on splitting the 5,000 in half, paying down the high-interest half first, then moving on to the interest-free card to have it paid off in time.  I'd then tackle the remaining balance.  We only have about $200/month to dedicate to the cards, as we are currently paying on our car loan (5,000 @5%), three hospital accounts (3,000 @0%), and our student loans (27,000 @ 5%).

I understand that the main argument against a move like this is that you don't correct the overspending behavior and chances are you'll just end up with more credit card debt and no savings, but I don't feel like we have a spending problem.  We made $45,000 last year and will make $63,000 this year.  With me staying home to raise our three kids, our finances are definitely tight, but staying in our budget is generally not a problem.

Would any of you seasoned vets support me in this tactic of withdrawing the $5,000 to just be done with the credit card debt?

Another Reader

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Re: Roth IRA withdrawal to pay off stubborn credit card debt?
« Reply #1 on: February 27, 2014, 09:56:03 AM »
No.  If you only have $200 a month to devote to paying down the debt, you are living way too close to the edge.  The first blip will put you right back into credit card debt.  Your household income should increase this year, per your statement.  Apply all increases to the debt and to an emergency fund.  Find side income or cut back someplace else if that's not enough.  If you post your budget, you will get suggestions on where to cut.

In addition, once the money leaves the Roth, the money and the compounded growth are gone forever.  Why lose what little you have invested, when you can find another way?

SunshineGirl

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Re: Roth IRA withdrawal to pay off stubborn credit card debt?
« Reply #2 on: February 27, 2014, 09:56:55 AM »
Yes, I would support you using $5K from your Roth to pay off your credit card debt. I think your household will be too stressful with that sort of high-interest rate debt hanging over you.

I hope your family is all well now, or on their way to being so.

matchewed

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Re: Roth IRA withdrawal to pay off stubborn credit card debt?
« Reply #3 on: February 27, 2014, 10:01:19 AM »
Fix the underlying problems as to why you couldn't pay off $7.5k surprise situation. It seems to me that you don't have a solid emergency fund and are unprepared to handle life's "uh oh's". Fix that and then you can pay off the card with your assets. But if you fix that you no longer need to dip into your Roth IRA. I don't think you have a spending problem, I think you have a common financial problem in being unprepared for life's curveballs.

phred

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Re: Roth IRA withdrawal to pay off stubborn credit card debt?
« Reply #4 on: February 27, 2014, 12:19:15 PM »
Don't touch the IRA at this time as you seem to have no other savings.  You're going from $45,000 to $63,000 this year?  That should net you about $14,000 per year to pay off a whole lotta stuff.  Don't reward yourself with the raise, pay off the old first.

Villanelle

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Re: Roth IRA withdrawal to pay off stubborn credit card debt?
« Reply #5 on: February 27, 2014, 12:27:35 PM »
Can you find a 0% or super low APR to which you can transfer those balances?

nottoolatetostart

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Re: Roth IRA withdrawal to pay off stubborn credit card debt?
« Reply #6 on: February 27, 2014, 12:28:25 PM »
Fix the underlying problems as to why you couldn't pay off $7.5k surprise situation. It seems to me that you don't have a solid emergency fund and are unprepared to handle life's "uh oh's". Fix that and then you can pay off the card with your assets. But if you fix that you no longer need to dip into your Roth IRA. I don't think you have a spending problem, I think you have a common financial problem in being unprepared for life's curveballs.

Totally agree with this.

Plus, try selling stuff...I have a goal to buy a new bike and a Children's museum pass, I have been selling crap around the house we don't use and adding savings there. You could use this principle to apply extra towards your debt. Odd jobs? Shoveling driveways? Can you work at night as a server while your husband is home with the kids? With your income increasing $20K this year, there's no reason why you can't have this debt knocked out by end of 2014, right?

Frankies Girl

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Re: Roth IRA withdrawal to pay off stubborn credit card debt?
« Reply #7 on: February 27, 2014, 12:36:23 PM »
Fix the underlying problems as to why you couldn't pay off $7.5k surprise situation. It seems to me that you don't have a solid emergency fund and are unprepared to handle life's "uh oh's". Fix that and then you can pay off the card with your assets. But if you fix that you no longer need to dip into your Roth IRA. I don't think you have a spending problem, I think you have a common financial problem in being unprepared for life's curveballs.

+1

Sounds like you made some miscalculations regarding funds needed when you moved, and then again when you added to your family - those things take money (and generally more than you think) and if you are living with no emergency fund then they can send you into a debt spiral that is difficult to pull out of. Don't touch the IRA. If your husband is going to be earning more, then save every single penny for an emergency fund and keep up the minimums on the debts owed. Then hit the debts REALLY hard once you've got a cushion saved up that can handle whatever life throws at you.

phred

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Re: Roth IRA withdrawal to pay off stubborn credit card debt?
« Reply #8 on: February 27, 2014, 01:18:47 PM »
Pay the minimums on the 0% loans, start putting $1,000 a month into a savings account once the raise hits, use the rest of the raise to pay off the debts that have interest starting with highest first, and get some term life insurance.

Once the 20% credit card is paid, consider starting your house-saving fund.