Should I cash in my retirement account to pay off a credit card debt?

Question

I am a stay at home mom of 8. My husband works full time but due to the economy we have had difficulty keeping up . All our bills are current but I have used almost all my mutual fund money to make up for the lack of income in paying the bills. Our house is up for sale in hopes of selling it to obtain a cheaper one and pay off credit cards. Our credit scores are in the 750's so we dont want to screw up those scores .Is it smart to use the retirement money to rid ourselves of debt and build the retirement back up? Our children will start college in 2 years These are the oldest of a long line of college bound kids. We have no savings or any other retirement money.We do not qualify for any government aid. Please help with any advice other than bankrupcy or those credit companies that ruin your credit scores.

Answer 1

Best Answer - Chosen by Voters

NO NO NO NO NO NO and NO!!!!!

If you pull that money out, you owe tax on it at what your current rate is OR higher if the distribution causes "bracket creep" AND you pay a hefty PENALTY for taking the distribution as well.

You are to be admired for being conscientious about your debt, but this is NOT the way to fix the problem...

Answer 2

No, that would be a huge mistake.

If you cash in your retirement account, you would owe taxes on the gains plus a 10% penalty for early withdrawal.

Answer 3

no. you should wait it out. ask the collection agency if they are willing to settle for less than what you owe. if not, then still wait it out. i bet in a year they will settle for much less.

Answer 4

You are the only person who can really answer this question for yourself.

You have to ask - what is more important to you: maintaining your good credit or continuing to build on your retirement savings. You have to sit down and figure our exactly how much you can actually cash out - what it the penalty amount on your plan? Then factor in the 10% taxes. Is the amount that is left really worth it to you?

If you want to keep your high credit scores by continuing to pay your debt on time each month, then maybe it is worth it to you.

In general, it is a bad move to do this, but, in some rare cases, depending on what is most important to you...it might be the thing to do.

Most importantly, is, if you are going to do it, make sure that it actually helps you. Make a plan for paying off those credit cards. You will feel really bad if you just stick a lump sum of money on each of your cards and, in the end, you still are stuck with monthly payments that bust your budget because you didn't pay "enough."

Sit down, do some math, and see if the balances work out. The worst would be to take the money out and still end up having to pay late on your cards.

Answer 5

If your retirement account is a 401k you can borrow money without penalty as long as it is paid back within a certain amount of time. If not, I would look into getting an unsecured loan to consolidate and pay off that credit card debt. You may even be able to pay that loan back when you sell your house. Given your high credit score that seems like a good option, the only problem might be providing proof of income. And make sure that your payments on the loan are something you can afford.

I think that would be a much better option than cashing out your retirement account.

Source(s):

B.S. in Finance, Corporate Financial Analyst

Answer 6

Remember that you have to be 59½ to withdraw money from your retirement plan without penalty. Even if you are 59½, remember that retirement plans are tax deferred, not tax exempt. You will still have to pay tax on the money you withdraw.

The former writer had a good idea. You may be able to borrow money from your retirement plan. Each plan has slightly different rules, so you'll have to check with your personnel department or your third party plan administrator. You'll have to pay interest on the money you borrow, but the interest will go back into your retirement plan. You're essentially paying interest to yourself.

Answer 7

The biggest problem that you have is that you do not make enough money. If you have to use savings to keep up your lifestyle then your lifestyle is to high. It sounds like a very difficult situation.
As far as pulling money out of your retirement it is a bad idea.
If you are in a 25% income tax bracket and you pull out $30,000 then at the end of the year your will owe $10,500 in taxes. Personally I think that it is better to owe credit cards then to owe the IRS.
If I were you I would absolutely get on a budget. As far as college money for your kids...Just let them know that there is not any. They will still be able to go to college but they need to come up with creative solutions. They could go to a community college half time for 8 years and pay cash...They could go into the military. There are ways if they really want to go to school. As a gift to them you need to get your retirement in order before you fund college for them. Trust me it is more of a gift to them to know that they will not have to support you in old age and support their own kids and try to save for their own retirement. So:
1.Budget (get your lifestyle below your income)
2.Credit Cards (pay them off)
3.Get an emergency fund (so you don't need credit cards)
4.Pay off your home
5.Fund your retirement
6.Fund college for kids

Source(s):

Check out Dave Ramsey