I am 30 years old and I have $18,000 or so in credit card debt. I started a small law practice a year ago and it’s going well, but I am scraping by. One major reason I am scraping by is because the interest rates on the $18,000 in debt went from 0% (when times were great) to now between 15% and 25%. My student loans total $145,000 and are eligible for a long-term, fairly low interest-rate payment plan. Only 1 group is currently in repayment and the remaining groups will be in repayment starting 12/15/09. HOWEVER, I also have $35,000 in a Roth IRA (down from only $40,000.00 at its peak). I am told I can take a distribution up to the total amount of principal without paying a tax on it and without a penalty. The principal amount is $23,000.00. My questions are 1) should I withdrawal enough funds to pay off my credit card debt from the Roth IRA? and 2) if I get into trouble paying off the student loan next spring, shoud I dip into the Roth IRA for that too? My thinking is that I’m paying OUT way more in interest on the debt I’m carrying than I’m MAKING on the money in my Roth IRA, I’m young and have plenty of time to rebuilt it prior to retirement, and the lack of debt will improve my credit score and thus my ability to obtain mroe favorable car loan terms, student loan consolidation terms, mortgage, etc. Please HELP me decide what to do here. Thanks
You have this all wrong. You are stealing from retirement to pay current lifestyle. You are cashing in assets at a low. With all the debt you have you’re talking about taking on more with a car loan. You should be basic transportation that you can pay cash for. You say you are young and have plenty of time to save for your retirement. Which means you don’t understand the basic concept of compound interest. A dollar saved at 30 will accumulate into a much larger amount than a dollar saved at 40 or 50. It sounds like you would like to live for today and let tomorrow take care of itself. We have a nation of people who believe and are living that way. Very dangerous. You need to learn to live within your means, spend less than you earn. And add to your savings, don’t take away from them.
I Have $18,000 in credit card debt & APR is high – Use IRA $$ to pay off?
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You have this all wrong. You are stealing from retirement to pay current lifestyle. You are cashing in assets at a low. With all the debt you have you’re talking about taking on more with a car loan. You should be basic transportation that you can pay cash for. You say you are young and have plenty of time to save for your retirement. Which means you don’t understand the basic concept of compound interest. A dollar saved at 30 will accumulate into a much larger amount than a dollar saved at 40 or 50. It sounds like you would like to live for today and let tomorrow take care of itself. We have a nation of people who believe and are living that way. Very dangerous. You need to learn to live within your means, spend less than you earn. And add to your savings, don’t take away from them.
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Hi- there is a new program for student loans called income based repayment. You might be eligble.
http://studentaid.ed.gov/PORTALSWebApp/students/english/IBRPlan.jsp
As far as the credit cards/roth are concerned, I would normally suggest that you not use the Roth to pay off the debt. Please look for other avenues first.
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It’s true that you’re extremely unlikely to earn between 15% and 25% per year in your Roth IRA. So on that basis, you should pay off the credit cards with the withdrawn Roth IRA principal.
However, have you considered bankruptcy as an option?
Credit card debt is unsecured debt, and your Roth IRA is off limits to creditors. While your student loan debt can NOT be discharged in bankruptcy, you mentioned you might get into trouble paying that off. If so, you may need the money in your Roth IRA for that purpose.
However, whatever you decide, you also stated this…
“will improve my credit score and thus my ability to obtain more favorable car loan terms, student loan consolidation terms, mortgage, etc.”
Debt is your problem right now. Before you’ve paid off your current debt, why are you already anticipating adding to your future debt load?
Why do you need a car payment? Instead, buy a used car with cash.
Why do you need a mortgage? Instead, rent and save money on home repairs and property taxes.
If you already have a mortgage, do you have enough equity to consolidate your credit card debt into your mortgage? That’s one possible option.
Nevertheless, run your life the way you would run your business. Cut expenses anywhere possible, and think of new ways to increase your cash flow. Use the difference to pay down your debts, and take advantage of this opportunity to learn some valuable lessons about debt. In other words, avoid it whenever possible…!
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