I have ~5k in a Rollover IRA
So the good people at Fidelity informed me that an existing pension plan has rolled into my new IRA. Right now I have $4723.97 sitting in a cash reserve account not doing anything. There’s a number of various investments I could do with this money. The other option would to take a hit and cash it out. There are things to consider though in order to withdraw money from an IRA.
| Starting Amount: | $4723.97 |
| 10% penalty: | - $472.40 |
| Income taxes: | - $637.74 |
| Remaining Amount: | $3613.83 |
Right now my Bank of America credit card balance is sitting at $3738.50. This left over amount along with a little extra to the minimum payment already due would clear that card completely. I would really like to rid my life of this stupid credit card, but is it worth the temporary sacrifice of an IRA? This is the debt reduction side of the argument though because I have debt on the brain right now.
My other option is to take that money and invest it in something. Right now with the market actually being down over 20% it means everything is on sale! At some point the money put in at a low point will be worth more as the market comes back up over time.
The last option and sometimes best when you don’t know what to do is to do nothing. There are always two options to every decision in life, something or nothing. Nothing would just keep this money in the cash reserve not doing anything. I think this is where I am at this month, but still weighing my options as I described earlier.
Question for my readers: What would you do: clear debt, invest, or nothing?
I would keep it in the IRA, you’ll need it when you’re older and this way is has so much time to grow! It’s not going to make a huge dent in your debts so let it be and forget about the market for a while. People are getting panicky about their retirement plans but the market historically adjusts like this.
One of the financial decisions I regret most is cashing out my retirement account from my last job when I started my current one. I rationalized it by telling myself it wasn’t *that* much money and that it would help with moving and other expenses. Of course, now when I hear about how such things grow over time, I kick myself in the butt for thinking short term instead of long term.
My vote is to keep it in the IRA.
I’d say leave it in cash reserves in the IRA for now. If you hit a true emergency, you can pay the taxes and penalties.
When you get to the point where you are in a position to bolster your official emergency fund, then you’ll be better able to deal with the risk of investment losses and can reconsider how to allocate these assets with an eye toward the long run.
The 10% penalty does not apply if you have more than 7.5% of you AGI in unreimbursed medical expenses. You also don’t have to itemized your deductions in order to take the 10% penalty exemption you just have to fill out Form 5329. So if you have more than $4,723 over your 7.5% of your AGI, you won’t have to pay the $472 penalty. You can read publication 590 in the IRS website for more information.
I have to itemize in order to get the deductions interest paid on my mortgage and student loans. I’m not so much worried about the 10% it’s the income tax part that really makes this deal add up. I don’t have enough medical expenses for the IRS to consider 7.5% unless stress from paying debt can be considered a medical condition. Either way though I still have to pay income tax on the money if I do this.
I understand the points for keeping it in the IRA. Right now I have a credit card costing me 16% interest a year. It would be hard to say that this money will gain me 16% plus inflation each year. Sure the long term aspect is something to consider, but being debt free sooner than later I would still have time to catch up. Treating it like an EF is also something I didn’t think about.
I would keep the money in the IRA and invest it in a decent mutual fund.
Although you are wanting the immediate grafitication of paying off a debt, wont your wife just rack that card up again if she notices it has been paid off.
No, I agree with the others, leave it in an IRA, where it cant be touched, especially until you get your wife on the same page financially.
I feel like you and I have had similar situations and questions about what to do with our finances.
My wife cashed in her IRA, because she wanted an emergency fund in case something happened during the close and purchase of our old/new homes. After it was all good, I insisted she put it back because of penalties. We instead erased all credit card debt. It just made better mathmatical sense because of our situation. You must also decide based on your own situation. I blogged about it. Good luck!
I’m not going to run for the hills and dump my 401k on top of the IRA. This IRA didn’t have money in it a few days earlier, but now that it does, I’m trying to understand why I should leave it there. I wouldn’t borrow money to invest it. Investing it may earn me more money over time, but dumping it now and paying off my BoA card would free up $80/month that could pay other debt. Even at that rate it would take around 4 years to clear the card. I could attack other debt faster without having that payment. I’d also like to note that our credit card debt isn’t going up from spending, we’re just not making large payments right now due to other things. The student loan debt has got me crunching numbers and trying to find a path. Thank you everyone for your input.
I’d take the money and dump the debt. But then, I’m at a point where I’m tired of being in debt and living minus paycheck to paycheck. If you wanted, you could take that extra $80/mo and build up another IRA or some other sort of retirement security but you’re not looking at retirement right now. From your posts, it sounds like you’re looking to get to a point where you can be almost debt free and then start saving. The interest that the credit companies charge doesn’t make the interest that banks give a fair exchange. Get rid of the BOA and continue to work towards your goals of being debt free.
Clear the debt!! there’s not better feeling than a paid off credit card!.
HS
I say clear the debt. I agree with Laura….the interest that the credit companies charge doesn’t make the interest that banks give on rates. But you have to weigh you personal situation for yourself.
It sounds like you’ve pretty much made up your mind. I hope you will check in on the short- and long-term results. Good luck with your decision.
This is tough decision to make. If you have room in your budget to pay all of your bills, then I would not cash out.
Chris I can make the payment and then some, but it’s a matter of paying BoA off with one big blow. This money was from a pension plan that rolled into the IRA, so it was just money for being employed. I would treat this like a bonus in a way. I’m also not freeing up a payment on this card to go and spend it, it will be snowballed into the next debt to get rid of it faster. It is a fact that debt will go down faster if you pay more towards the principle. It would be awesome to get down to 4 cards, and hopefully later this year just 3. Early next year we could be down to 2. That’s the feeling that drives me right now.
No way. It can never be paid back. But hey it if makes you feel better do it. It is personal finance.
But be warned it can turn into horror show if you rack up debt say even in 10 years when you have kids.
Life is about changing behavior so I’d pay it off myself instead of using the IRA.
Forgot it adds to taxable income both state and federal wise, extra $5k in taxes, bad if you are on the line for taxes. And to cash it out it appears you are losing 25% minimally, ouch.
I guess the question of whether to cash out the IRA to pay off the credit card would depend upon whether you and your wife have avoided charging new debt onto cc’s for the past 12 months (i.e., whether you’ve changed the underlying behavior that caused you to rack up the cc bills). If not, paying off this BofA credit card is not a good idea since you’re sacrificing your future for a temporary fix.
Based upon my calculation, if you pay $80/month on your 16% APR $3,738.50 cc debt, it’ll take you approx. 6 years to pay it off.
If you leave your $4,723.97 in your IRA by investing in cheap index funds now, you’d have approx. $103k in 40 years assuming a 8% yield.
Although you may be a good candidate, your wife doesn’t seem like she is. But, since I’ve only read part of your blog, you would be a better judge of that.
Confession: Last year I cashed out $6,279 of my IRA contribution to pay off some (but not all) cc debt. Since my monthly debt payments exceeded my monthly income at the time, this was the only option to reduce my debt payments within my income. (I also did not have to pay any penalties and income tax since my IRA was a Roth and I only withdrew my contributions.)
Although I’m down to one manageable cc debt now, I still rue the missed opportunities from the IRA withdrawal.
Since it sounds like you’re a bit light on your EF, have you considered converting the IRA to a Roth IRA? Sure, you’ll end up paying ordinary income tax on the converted amount (and you won’t be able to touch the converted amount for 5 years without incurring a tax penalty). But your Roth can serve 2 purposes: as a retirement fund and as an EF that you can tap in a true emergency. Since you can’t withdraw the converted amount for 5 years without incurring a penalty, hopefully you won’t be tempted to tap it in the interim.
That being said, I don’t want to discount the empowering motivation you get in paying off a credit card. If tapping your IRA to payoff this cc will motivate you to snowball the $80 payment to tackle another debt, go for it.
Best of luck.