Friday, November 14, 2008

Does It Make Sense to Tap Into Your IRA for Debt?

Does It Make Sense to Tap Into Your IRA for Debt?

IRA stands for Individual Retirement Account. This is money put aside for a time when you're not working. However, it may be the case that as you've been busy building up your IRA, you've also been busy building debt. While only you can ultimately decide whether it's a wise to take cash from your IRA to pay off that debt or not, there are a few things you should consider.

Figure in Penalities

    If you have a traditional IRA you will be charged an early withdrawal fee of 10 percent and the money you take out will be taxed at your regular tax rate unless you meet specific requirements. A few of these exemptions include being at least 59 1/2 years old, being disabled, paying for college, paying your own health insurance premiums after 12 weeks of unemployment, and paying an IRS levy. If you're considering getting cash from a Roth IRA and are not at least 59 1/2 years old or have not held the account for a minimum of five years, you may also be hit with the 10 percent penalty and subject to income taxes. Consider whether the money you will save on interest payments to your creditors outweighs how much it will cost you to get cash from your IRA.

Talk to an Accountant

    No matter how desperate you are to rid yourself of debt, take the time to speak with an accountant. If you don't feel you can pay an accountant, use one of the free online programs that shows you how much the money in your IRA will be worth at retirement if left alone. With compound interest, that money is likely to grow substantially. Once you've seen how much the undisturbed money is going to be worth, you may find it is not a sound financial decision for your future.

Consider the Worst Possible Scenerio

    If you're struggling to pay debt, there's no guarantee that money from your IRA will cure the situation. Unforeseen circumstances, such as illness or job loss, can cause you to get into debt again, leaving you in worse shape than before. By cashing out your IRA you may be emptying one of your few protected assets in the event of bankruptcy.

After You've Done the Math

    If, after you've weighed your options, you decide to work on your debt without disturbing your IRA, there are creative ways to approve the problem. You can save money in simple ways by cutting down the number of times you eat out a week or buying specialty coffee, ride-sharing, downgrading your cable, getting rid of your land line telephone, paying bills online rather than buying stamps, and turning your thermostat up in your home while you're away. All of these savings can be applied to the principle on your debt, helping you to pay it off sooner. It may be that you'll feel better about the situation once you know there's an end in sight.

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