IrA funds to pay off High interest cc debt

[Anonymous]

I have some high interest cc debt.

I was thinking of taking an early withdrawal to pay off the debt.

I know its not normally a wise thing to do, but the debt is at 19.9% and the total cc monthly payments are becoming

burdensome.  I know you pay a 10% penalty and pay  the income tax, but when I calculate how long it will take to pay off the cc debt, it looks like it cost me less to take out the IrA funds.  Also, since you pay taxes on the IRA withdrawal regardless when you pull the money out, I think you should only compare the 10% penalty to the 19.9% ( each year) interest cost. When you do that, it seems like a no brainer to use the IRA funds.

Any advice would be appreciated.

Thanks.

[haulingthescoreup]

I cashed in a small 403(b) (non-profit employer verson of 401(k)) to pay for a used car. I paid everything I could find at the time, but I still got killed on taxes, partly by getting kicked into a higher tax bracket. I still haven't figured out what happened.

Do you have an option to borrow from your IRA? I know that there is often an option to do this with a 401(k).

eta: and how old are you, and how many years before you plan (hope, pray) to retire?

[Anonymous]

That is a good point. You cannot borrow from an IRA. I am about 15 to 20 years from retirement.

Normally I recommend withholding about 25% on an early IRA withdrawal, 10% for the penalty and 15% for ordinary income taxes.

But if you are in a 25% or higher tax bracket you could still owe money at the end of the year.  It is probably better to withhold 30%.  That is why people say its too costly to make the early withdrawal.  However, if I'm paying nearly 20% interest and it takes me 4 years to pay off the CC debt, it seems the early IrA withdrawal is still less expensive, not to mention, you have to pay the ordinary income tax at some point anyway and thus its not your money to begin with. The only additional cost seems to be the 10% penalty.

when you compare a 10% one time hit to a 20% interest rate for 4 years it seems like a no brainer.

Am i missing something??  Additionally you could then use the monthly payment on the high interest debt you were making to pay off lower interest cc debt, and or invest the money for retirement.

Thanks again.

[haulingthescoreup]

I just noticed your screen name. Are you a financial professional? (Just curious.)

The big problem with killing off a retirement account is that unless you can stick the money back in immediately, you're going to lose the time value for appreciation on your investments. (Assuming that they go up instead of down, of course.) If you're close to retirement, you might not catch up. If you're a good ways out from retirement, you could potentially lose a lot of appreciated value in the account. I suppose that a lot will depend on how significant a chunk of your savings this account represents, and how quickly you can get money back into the IRA.

If your credit is decent, you might want to look into a loan from a credit union, etc. You could then pay off the high-interest CC immediately and then pay off the loan at a (presumably) lower APR. This would also help your FICO scores by moving debt from revolving to installment, which is scored differently, although your foremost consideration should be financial good sense, rather than goosing your FICO's. Do a lot of research, though. Depending on the lender and how your overall credit looks, they might require that you close down any CC that you're paying off in this manner, and you might not be too thrilled about this.

You might also investigate doing a BT (balance transfer) to a different card. Be sure to figure in the BT fee with the cost of the BT APR. So if you have a 2.99% BT APR offer for 12 months, and there's a 5% fee for the transfer, you're really paying more like 8%. Still beats 20%, though.

There are costs of one type or another involved with all these actions. One option is to leave the balance where it is and accelerate your payment. Any additional amount would go straight to principal, knocking it down more quickly and reducing the total amount of interest paid.

You'll have to look at your specific situation, in terms of your own tax status, the amount to be paid off, and whether you have other options in the form of a loan or BT, or extra cash to kill off the CC balance. I never had high CC debt, as in the kind that keeps you awake at night, but a daughter's college financial aid changed and I suddenly had to come up with extra tuition. I wound up picking up a second, part-time job. It was really satisfying to knock off that chunk of money with a second paycheck. It's certainly not an option for everyone, though, especially in this lousy economy.

[Anonymous]

Thanks, hauling. You've given me alot to think about.

All good points.  Sometimes you are too close to a situation to think straight.

thanks again.

the CC debt is in wife's name.

She is currently not working.

My credit is good at:

EQ- 766

TU- 761

EX- 734(lender pull 01/10)

Can I do a balance transfer from my wife to my card? I'm thinking not.

do you think an installment loan would be better than the BT?

[haulingthescoreup]

I * think * that you can BT directly from her card. It might involve an intermediate step, like using a BT check to pay off her balances, when then starts a new BT for you. But I think I've read that all you need for an online BT is the account number, and that others have done BT's for family members' accounts.

Anyone else have more precise info on this?

As for the installment loan vs BT, it will depend on the deals that you can get for each. The cost of a BT will depend on the combo of BT fee + APR as mentioned above. If you do a loan, you probably won't get as low of an APR. If you do a BT, your scores will drop, because this will show up as revolving util, whereas installment util (i.e., a loan) has very little impact on FICO scores. Either would involve minor-ish score damage for the inq and new account.

One slight finagle that can often be done with BT's that result in high individual account util is to ask the bank for a higher CL, specifically because you don't want your scores to be hurt as badly. I did this with BofA and went from a $10K to $18K BL immediately after doing my first BT, because with the fee, my BT balance was $8400, making it 84% util. Raising the CL to $18K dropped the util below 50%. But this was in the spring of 2008, before the Great Meltdown, so I don't know how likely it would be that they'd do this again. It's a thought, though.

[MarineVietVet]

Several times I have had the funds electronically deposited. I don't believe the creditor cares what account it goes into. That would be any easy way to do a BT into any bank account you choose.

From a BK years ago to:
EX - 9/09 pulled by lender 802, EQ - 10/10-813, TU - 10/10-774

"Some people spend an entire lifetime wondering if they've made a difference. The Marines don't have that problem".

[marty56]

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@Anonymous wrote:

I know its not normally a wise thing to do, but the debt is at 19.9% and the total cc monthly payments are becoming

burdensome.

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National City will just send you a check to do with what you want.  Your post implies that you are having trouble making the payments so I don't think a BT will help here since your payment will go up.

A better option, if you can afford to make the payment would be a DMP program for your wife.  It is FICO freindly and will save you money.

[Anonymous]

what is a DMP program?

Does it involve settlements?

How does it work?

[MarineVietVet]

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@Anonymous wrote:

what is a DMP program?

Does it involve settlements?

How does it work?

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DMP= Debt Management Program.

I'll let marty56 explain it but until he logs back on here are some older threads talking about DMP.

http://ficoforums.myfico.com/t5/forums/searchpage/tab/message?q=marty56+%2B+DMP

From a BK years ago to:
EX - 9/09 pulled by lender 802, EQ - 10/10-813, TU - 10/10-774

"Some people spend an entire lifetime wondering if they've made a difference. The Marines don't have that problem".