I don’t know anyone who likes having heavy credit card debt.
It hangs over consumers like a dark cloud affecting every spending decision
they make and causing constant stress.
And it’s even worse if the credit card kicks in a high
interest rate, which they commonly do. Consumers often end up paying between 19
and 29 percent interest on the balance. At those rates it can be difficult to
ever pay it off.
It’s no wonder that some people consider tapping their retirement
accounts—such as a 401(k), 403(b), IRA or similar version—to pay off their
expensive credit cards.
To some it’s a logical decision: you’re thousands of dollars
in debt, paying astronomical interest rates on the balance, barely able to make
the minimum monthly payment and looking at carrying debt forever. Yet, there
sits a retirement account with ample funds that could easily cover the credit
card balance.
It’s tempting: use those retirement funds to pay off those
credit cards and be done with them once and for all.
But it may be a mistake, and in many cases it doesn’t work.
Withdrawing money from your retirement account can be costly
and paying off your debt may not actually reduce monthly payments by enough to
solve the problem. As a result you could end up worse off for having used
retirement funds and not solving the problem.
When you withdraw money from your retirement account you are
losing much more than just the amount you take out. For one thing, by reducing
the amount of that account you are losing valuable purchasing power and
forfeiting all the interest that money would have earned over the years. That
can be a substantial amount.
And if you withdraw before you are eligible (at age 59 ½
with some exceptions), you are likely to receive 30 percent less after
penalties and taxes.
That’s right: be sure to consider the tax burden that early
retirement fund withdrawal will incur. Unless you have a Roth IRA, regular
income taxes will be assessed on all retirement fund withdrawals.
Of course, there may be some legitimate reasons and
scenarios in which it is prudent to make early retirement fund withdrawals.
Often, for people who lose their job for various reasons,
the retirement fund comes on the table as a consideration of living income. And
in some cases, retirement funds may offer a loan option, such as for first-time
homebuyers, in which you borrow from your fund (borrowing from yourself, in
effect) and pay it back over time.
But because there is likely a heavy penalty, taking money
out of your retirement fund should be considered a last resort, reserved for
emergencies.
There are better solutions for people carrying high-interest
credit card balances and they don’t involve bankruptcy, debt settlement or
consolidation.
Of course every situation is different and no single debt
solution applies to all consumers. But a good place to start is a consultation
with a debt or credit counselor, of which there is a large variety available.
A reputable debt counselor can help you devise a realistic
plan for paying off your credit card and other debt without resorting to dire
measures, as well as assisting with a solid budget and savings strategies to
avoid unnecessary debt in the future.
For advice and information on finding a credit counselor,
you might check the Federal Trade Commission website, www.ftc.gov.
When seeking out debt or credit counseling, whenever
possible try to find someone local or within your area so that you can meet in
person. And be sure to shop around. In the world of debt counseling there are a
lot of scams looking to prey on the vulnerable.
At the very least, be sure to consult with a debt counselor
before touching that retirement account. With most debt counseling services—including
PowerDownDebt—the first consultation is free.
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