Dip into IRAs to pay off CC debt?

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Topic Author
readZinn
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Dip into IRAs to pay off CC debt?

Post by readZinn »

I'm grateful to have found this forum. There is a wealth of information here and I plan to read as much as I can. In the meantime, I would appreciate some advice.

Backgroud:
I'm 33, married, 2 kids. Do not plan to have anymore. Wife is a SAHM.

86k gross income w/ annual bonus (9-12k).
Work for family business (<5 employees).
No health insurance, no 401k. Just 2% match in a SIMPLE IRA. I am not contributing at the moment.
As things stand now, I expect to be mid-six figures in 2-3 yrs.
Receive 2,500/month from rental property (mortgage is 1,500/mo). House appraised for 370k. Mortgage balance is 244k @ 3.5%.
Principal residence is worth about 350-400k. Free and clear.

42k in Traditional IRA
17k in Roth IRA
10k in 403(b)

No emergency fund. No savings.
38k @ 8.4% (avg) in credit card debt (across 3 cards). I'm ashamed. We have committed to stop using them.
86k @ 6% in student loans (wife and I).
40k car loan @ 2%. We have two other cars--worth about 20k combined--that are paid off.

Monthly Expenses:
1,500 (mortgage on rental)
1,000 (health insurance)
647 (car payment)
520 (utilities/cable/cell phone)
500 (groceries)
468 (student loans)
225 (gas)
150 (misc)
100 (entertainment)
90 (car insurance)

We have a lot of work to do and are not where we would like to be financially. We are working to reel in spending.
My question to all of you is, would it make sense to pull money (some? all?) out of the IRAs to eliminate the CC debt and some of the student loan debt? We would like to be debt free as soon as possible and then begin to save as much money as possible towards retirement.

Any other advice you may offer would be appreciated. Thanks!

Again, glad to be here.
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Re: Dip into IRAs to pay off CC debt?

Post by placeholder »

That's tax advantaged space you'll never get back and don't forget that any that comes out of the TIRA will have tax and penalty due so with the interest rates not all that bad I'd look to see what emergency budget measures you can put in place to get it down.
billern
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Re: Dip into IRAs to pay off CC debt?

Post by billern »

Cut costs to avoid any additional CC debt. Get a line of credit on your house to pay off the high interest debt to get the rate lowered. Aggressively pay off debt. As soon as debt it paid off, shift those extra monthly funds towards contributing to retirement accounts for you and your wife\.
DSInvestor
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Re: Dip into IRAs to pay off CC debt?

Post by DSInvestor »

Cut costs.

$520 for utilities, cable and cell phone seems high. If running AC, set AC a few degrees higher and check that house is sealed tight. If not running AC, then these costs are nuts. Cut premium tv channels or TV subscription altogether and get a subscription to netflix, hulu or Amazon Prime.

40K car loan? Do you need 3 vehicles?
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livesoft
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Re: Dip into IRAs to pay off CC debt?

Post by livesoft »

I read this as a case where owning the primary residence free and clear was perhaps not the best idea. I don't know how that happened because maybe the home was gifted or paid off with an inheritance or other windfall. I'd get a mortgage on the house and clear out all other debt. Maybe even sell the homes and move to a less expensive place. It just appears to be a simple matter of biting off more than one can chew, so that one is choking. A commitment to LBYM would need to be in place beforehand or the debt issue would simply reappear.
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Duckie
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Re: Dip into IRAs to pay off CC debt?

Post by Duckie »

readZinn wrote:86k gross income w/ annual bonus (9-12k). <snip> As things stand now, I expect to be mid-six figures in 2-3 yrs. <snip>

42k in Traditional IRA
17k in Roth IRA
10k in 403(b)
Whose are these, his or hers? Where are they held? What do they contain now? What are all the 403b options? Can the 403b be rolled over into an IRA?
No emergency fund. No savings.
You can use a Roth IRA as an emergency fund as long as the Roth holds a conservative asset like a short-term bond fund or a CD. It's at least a start.
Monthly Expenses:
1,500 (mortgage on rental)
1,000 (health insurance)
647 (car payment)
520 (utilities/cable/cell phone)
500 (groceries)
468 (student loans)
225 (gas)
150 (misc)
100 (entertainment)
90 (car insurance)
That adds up to $5200. I don't see the credit card debt. What do you have left over after these are paid?
My question to all of you is, would it make sense to pull money (some? all?) out of the IRAs to eliminate the CC debt and some of the student loan debt? We would like to be debt free as soon as possible and then begin to save as much money as possible towards retirement.
Being debt-free is a worthy goal. However, you only have so much tax-sheltered space available each year. If you don't use it you lose it. You should be maxing Roth IRAs for you and your wife plus contributing what you can to the SIMPLE IRA up to $12K per year. That space is valuable. What are the options in the SIMPLE IRA?

Since you will be making mid-six figures in two to three years you can either live with the debt until then or get a HELOC on your house to pay off the two higher cost loans. I recommend the HELOC. Don't liquidate your current tax-sheltered assets. Have you considered selling the rental?
Alan S.
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Re: Dip into IRAs to pay off CC debt?

Post by Alan S. »

What state are you in?
Reason for asking - if your state protects your IRA against creditors, you may not want to pull money out of your IRA and expose more of your assets to creditors than you already have exposed and decrease protected amounts. IRA creditor protection should be factored into this decision.
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grabiner
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Re: Dip into IRAs to pay off CC debt?

Post by grabiner »

I would recommend selling the rental property; your equity in the rental should be enough to cover the credit cards and student loans. If the rental property is a decent investment for the average investor, it is a poor investment for you, as you can earn 7% risk-free on an alternative use of the $126K equity you have there.
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mnvalue
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Re: Dip into IRAs to pay off CC debt?

Post by mnvalue »

You should be able to do all of these things immediately:
- Fix the spending problem (as you said you committed to), including cutting costs (as was already mentioned). No more car purchases until the credit card and car debt is paid off. Any bonuses, windfalls, tax refunds, and at least half of any raises shall go to retirement or debt pay down; no exceptions.
- Start contributing to the SIMPLE IRA up to the match. Stop giving up free money.
- Refinance the other cars and put that cash immediately on the credit cards. This leaves you about $18k on the cards.
- Take out a home equity loan for that $18k and zero out the credit cards. CUT THEM UP. Have, at most, one card that's set to auto-pay in full out of your checking account. Use it only when necessary (e.g. hotels, renting a car, paying at the pump for gas) and treat it like a debit card. For everything else, even where plastic is required (e.g. online purchases), you can use an actual debit card.
- Make sure the student loans are on auto-payment to get any interest rate discount.

The only problem is if you can't cash flow all of the loans. So watch the payment amounts. But I doubt they'll be worse than the credit cards.

With any cash flow left over, build up an emergency fund of at least $1,000; then put that in Vanguard Target Retirement Income inside a Roth IRA.

Optionally: Consider refinancing the student loans into the home equity loan, but only if you can get a fixed rate of less than 6% with a payment you can afford. Consider selling one or more cars or the rental property.
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Re: Dip into IRAs to pay off CC debt?

Post by placeholder »

I don't recommend taking a home loan to pay off the credit cards because it turns unsecured debt into secured and acts as a magic "get out of debt" card that make it more likely that they'll run the cards right back up versus having to scrimp and cut the grocery budget and eliminate entertainment and all the other belt tightening that will remind them of how painful it was to get in that mess.
Boglemama
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Re: Dip into IRAs to pay off CC debt?

Post by Boglemama »

I hate agreeing about selling the rental, because I have a rental, but I agree. I'd sell it and pay off the CC debt and part of the student loans, while saving some for an emergency fund. You definitely need an emergency fund.

Why 3 vehicles with 2 people? I'd sell one of them. Extra insurance and maintenance is unnecessary.

NEVER, EVER dip into your IRAs to pay off cc debt. I'd take out a HELOC or car loan on the paid vehicles before I'd do that.

I'd research budgeting and read The Millionaire Next Door.
Boglemama
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Re: Dip into IRAs to pay off CC debt?

Post by Boglemama »

I read your post again and noticed no property taxes or insurance in your budget. For your house or the rental. There are actually a lot of things left out. I'd definitely research money management and work with your wife to construct a thorough budget.

At your young age you probably want to get wills & life insurance too. If you start now and reel in the spending while amping up the saving, you will be a millionaire in no time!
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Rainier
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Re: Dip into IRAs to pay off CC debt?

Post by Rainier »

Boglemama wrote:I read your post again and noticed no property taxes or insurance in your budget. For your house or the rental. There are actually a lot of things left out. I'd definitely research money management and work with your wife to construct a thorough budget.

At your young age you probably want to get wills & life insurance too. If you start now and reel in the spending while amping up the saving, you will be a millionaire in no time!
Agreed, and you seem confused about the rental. The mortgage on the rental is not a personal expense. The rental is a little business. All that matters is net income from the business or net cash flow. Are you really betting $1k per month or did you miss tons of other expenses? Taxes, maintenance, etc.
Topic Author
readZinn
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Re: Dip into IRAs to pay off CC debt?

Post by readZinn »

Thank you everyone for your advice!

To answer a few of your questions:

State is California
Principal residence was a gift/inheritance. Property taxes are low at ~$500/yr (prop 13). Insurance is ~60/month. I did not list that, you're right.
Property taxes and insurance on the rental are included in the the $1500/mo number. Maintenance on the rental has been minimal (so far). The lease terminates in Feb. and the current tenants have expressed interest in signing another 2yr. lease, but I'm not adverse to selling it to pay off debt. This is actually looking very attractive.

True, our current monthly expenses are less than our monthly income--the difference is currently being used to pay down debt. I neglected to mention that the expenses I listed are budgeted amounts. We seem to blow past the variable expenses each month, hence our debt situation.

We will not use any of the IRAs to pay off debt and going forward will max out our IRAs as best we can. I am also going to contribute to the SIMPLE IRA through my employer. We will consider a will and life insurance.
Wife and I have both committed to stop using the cards and to cut expenses (no more restaurants--that was killing us).
We plan to sell one of the vehicles.
sscritic
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Re: Dip into IRAs to pay off CC debt?

Post by sscritic »

readZinn wrote: State is California
Principal residence was a gift/inheritance. Property taxes are low at ~$500/yr (prop 13).
Combined with Prop 58 or Prop 193.
What are Propositions 58 and 193?
Proposition 58, effective November 6, 1986, is a constitutional amendment approved by the voters of California which excludes from reassessment transfers of real property between parents and children. Proposition 58 is codified by section 63.1 of the Revenue and Taxation Code.

Proposition 193, effective March 27, 1996, is a constitutional amendment approved by the voters of California which excludes from reassessment transfers of real property from grandparents to grandchildren, providing that all the parents of the grandchildren who qualify as children of the grandparents are deceased as of the date of transfer. Proposition 193 is also codified by section 63.1 of the Revenue and Taxation Code.
Note that the parent doesn't have to die; a gift is covered as well. This only has to do with property taxes, not basis for a gain on sale.
Topic Author
readZinn
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Re: Dip into IRAs to pay off CC debt?

Post by readZinn »

Correct.
jmg229
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Re: Dip into IRAs to pay off CC debt?

Post by jmg229 »

If those numbers are right, I have trouble seeing why you would sell the rental. If it is actually netting you almost $1000 a month and you have good tenants willing to sign on for 2 more years (after the next 6 months), I would think that working on selling one of the cars, as you indicated you will, and reducing spending to stay within your budget are key. You have a lot of potential here, it is about learning to live within the budget. If you manage to do that, you have enough income that I would think that you can right the mistakes you have made in the past. I'm not sure I'd dump the rental just to quickly erase all debt as that will drag on your future earnings potential once you are past this bump in your financial life that you have identified.
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RyeWhiskey
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Re: Dip into IRAs to pay off CC debt?

Post by RyeWhiskey »

I'd say that before you consider something relatively drastic like selling the rental, taking out a mortgage on the home, or liquidating your limited tax-shelter space, you should take one month and dedicate yourself and your spouse to budgeting. You could very well benefit from software like YouNeedABudget (check it out). Before you remove potential future earnings (rental property), get real about your finances. No more "blow past our expenses each month." This behavior is what put you in your current situation and getting out of debt now won't change that behavior, only you and your spouse will. So before you sell the rental as an easy fix (it isn't a fix by the way), why not give it a good shot at actually fixing the problem: you and your spouses spending habits and lack of budgeting. I think you can do it and wish you the best of luck. :beer
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lululu
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Re: Dip into IRAs to pay off CC debt?

Post by lululu »

That's a pretty big expected salary increase in a few years. Why do you expect that? How sound is the family business?

I second frugality for a month before doing anything like deciding to sell the rental, although you seem to have a superfluous car. Always ask yourself before buying something, do I need this or just want it, what happens if I don't buy it.
Topic Author
readZinn
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Re: Dip into IRAs to pay off CC debt?

Post by readZinn »

Thanks, this is all great advice. We'll see how this first month of budgeting goes and report back before we make any big changes like selling the rental. Looking into YNAB.

Family business has been around 30+ years. It's fairly strong. Two family members (who started the business) are retiring in about 3 years and I, along with another family member, will be taking their place.
crowd79
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Re: Dip into IRAs to pay off CC debt?

Post by crowd79 »

Taking money out of retirement accounts to pay off debt is a terrible idea, unless to avoid bankruptcy.
crowd79
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Re: Dip into IRAs to pay off CC debt?

Post by crowd79 »

DSInvestor wrote:Cut costs.

$520 for utilities, cable and cell phone seems high. If running AC, set AC a few degrees higher and check that house is sealed tight. If not running AC, then these costs are nuts. Cut premium tv channels or TV subscription altogether and get a subscription to netflix, hulu or Amazon Prime.

40K car loan? Do you need 3 vehicles?
Hulu + can also be had for "free". Just do your normal internet searching with Bing and earn Bing rewards.
tomd37
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Re: Dip into IRAs to pay off CC debt?

Post by tomd37 »

ReadZinn,
Looking at your original post and the expense categories caused me to go back and look at my budgeted categories while I was working (I am retired now). Those categories included:

Mortgage, electricity, natural gas, water, telephone (cell and landline), home security service, homeowners association dues, household operations (food and everything used in the home), clothing, recreation, charity, spouses personal items/allowances, cable television and internet service, medical/dental/vet, lawn care, subscriptions/memberships, garbage collection service, life insurances, property tax, home insurance, Christmas and other gifts, vacation, auto insurance, auto gas and repairs, home maintenance, life insurances, long-term care insurances, etc. And there could be other categories.

I know I might seem anal with these detailed categories, but many of these same expense categories carried forward into my retirement starting twelve years ago, except that the mortgage was paid off two years prior to retirement. Personally I don't see how a family of four can only expend $500 a month for food and everything else purchased at a grocery store.

Have you really done a two or three month study to find out what you are actually spending? And don't forget those items that come up monthly, quarterly, semi-annually, or annually. It is easy to overlook those items when you are trying to figure out where all the money went. :dollar

Edited: PS: By all means do not cash in the IRA and incur the normal income tax bill on that distribution PLUS an additional 10% penalty on that same distribution amount. You would only be adding to your indebtedness. :oops:
Last edited by tomd37 on Tue Jul 08, 2014 3:09 pm, edited 1 time in total.
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lhl12
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Re: Dip into IRAs to pay off CC debt?

Post by lhl12 »

Do not dip into IRA's - that tax-advantaged capacity is too valuable.

Selling the rental might make the most sense, but take a hard look at the alternative of putting a primary mortgage (possibly also including a HELOC) on the main house. You could use it to consolidate all your debt into one loan, which would be tax-deductible if you itemize.
Acesalad
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Re: Dip into IRAs to pay off CC debt?

Post by Acesalad »

I am from the Dave Ramsey School and I think you should do everything you can to simplify your life and get out of debt as fast as possible. My wife and I have been doing it for two years and out of $100,000 in debt we have $37,000 left.

You are trying to do too many things at once. Pay off CC debt, Pay off SL debt, Pay car debt, Save for retirement, Be a landlord.

First question: Do you need three cars? If not the one with the 40K loan should be gone by the end of the week. If yes, sell all three, assuming you break even on the one with the loan, you will have about $20K (since you said the other two were worth about 20K) and buy three $7,000 cars. $647/month freed up and $40K of the debt GONE.

$124,000 debt left. Sell the rental: 370K-244K = 126K (Probably less because of commission, etc.) but that should about pay off the CC and the SL. If there is some debt left you have the car payment, $647 plus your current SL payment $468 plus whatever you were paying for the CC to throw at it, Over $1,000 per month should have it knocked out in no time. Now you are DEBT FREE, house and everything in a few months.

You now have $2,315 in monthly expenses. You are probably bringing home $6,000/month assuming you bonus is added to the 86K, if not probably $5,000/month. You have plenty to put into retirement and can probably start saving for kids college and you will still have money left over to invest, save toward another property or just blow.
Hypersion
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Re: Dip into IRAs to pay off CC debt?

Post by Hypersion »

Focus on building net worth. Cashing in a IRA to pay off CC will lead to a huge drop in NW for little long term gain. Same with selling off what sound like to be a very profitable rental unit.
ddunca1944
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Re: Dip into IRAs to pay off CC debt?

Post by ddunca1944 »

readZinn wrote:Thanks, this is all great advice. We'll see how this first month of budgeting goes and report back before we make any big changes like selling the rental. Looking into YNAB.

Family business has been around 30+ years. It's fairly strong. Two family members (who started the business) are retiring in about 3 years and I, along with another family member, will be taking their place.
+1 for YNAB. Sounds like you would benefit from a structured approach. I'd take a hard look at your spending history for the last 3-4 months. How much was actually spent on the items you listed? If you budget an unrealistic amount for something, it's not going to work.

2nd all the voices saying "leave the IRA alone"....
Traveler
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Re: Dip into IRAs to pay off CC debt?

Post by Traveler »

I'd sell the $40K car as you don't need a 3rd car, nor do you need one that expensive. At the same time I would check out Dave Ramsey's program for getting out of debt and living within your means. He has a six step program for getting you back on track but it requires work and sacrifice. You're not in over your head yet so it's a good time to start working on it. Good luck!
Acesalad
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Re: Dip into IRAs to pay off CC debt?

Post by Acesalad »

I'd sell the $40K car as you don't need a 3rd car, nor do you need one that expensive. At the same time I would check out Dave Ramsey's program for getting out of debt and living within your means. He has a six step program for getting you back on track but it requires work and sacrifice. You're not in over your head yet so it's a good time to start working on it. Good luck!
I agree. As I said, I am a follower of Dave Ramsey. You should check out his website. You can read his book, The Total Money Makeover, or take his Financial Peace University class, either at a local church, online or buy the DVD. I suggest the class. That's what my wife and I did. It is better to do it with others in similar situations and get the feedback. Whichever you do, if you choose, you and your wife must do it together. You can't have one person doing all the finances and the other just going along with whatever their spouse says. You both need to be involved.
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