AboutGina Boykin Expertise Financial planning, debt management & credit cards, and money-saving tips for adults and teens. Saving vehicles such as CDs, treasuries, bonds, and money-market funds. I provide honest, objective and relevant information to help you made the best decision for your money.
Experience Over 10 years of combined experience in accounting, audit, investing, entrepreneurship, real estate.
I am the CEO of Atlanta Y.E.S., a nonprofit organization dedicated to financial literacy for youth.
Education/Credentials B.S. Accounting, 10 years of experience in accounting, audit, and investing
Question Our credit card debt is extremely high & we will not be able to continue making all the payments, however, we have a retirement account that could eliminate 90% of the debt putting us back in a positive cash flow situation that would allow us to begin to save again. Is it advisable to do this?
Thanks so much!
Answer You need to proceed with caution on doing this. Have you considered the fact that there will be penalties, as well as federal and state taxes, taken out of your withdrawal? Many times the taxes and fees can add up to 40 percent of the total. So if you need, for example, $50K to get rid of your debt, you may have to withdraw a little over $83K to cover it. This should be an absolute last resort. Another reason it's not the best choice is that it is an easy fix. People who do this are likely to run up debt again, and the next time they will be in even worse shape - high debt AND no retirement savings. Remember, retirement accounts are exempt from being liquidated if you ever have to file bankruptcy, so it's something you should try to keep if at all possible. It is an option, but I just want to emphasize that it should be your last option.
As an alternative, please consider doing the following:
If you have any credit card balances that can be transferred to a lower rate card (even a new card) for a promotional period, do that to give yourself some room.
If one of your payments is your mortgage, see if you qualify for assistance through the government. The website is makinghomeaffordable.gov. You may be able to get reduced payments.
If you have any significant car payments, consider selling the most expensive car for a much cheaper one. Even if you are upside down on the loan a little bit, it would be worth taking a personal loan for the difference and getting a cheap car for a couple of years.
Seek counseling with the National Foundation for Credit Counseling, nfcc.org. They work with people who are struggling, and with their lenders, to work out payment plans that will be manageable. Due to the current state of the economy, credit card companies are much more willing to work with you and you may be able to get reduced payments, reduced interest rates, or a reduced settlement as payment in full. Even if you don't want to use their services for working with your lenders, you can work with them on setting up a budget and may learn ways that you can save money to use toward your debt.
Also, consider cutting your expenses to the bare minimum if you have not already...no more eating out or cable or expensive cell phone plans. Cut where you can.
