AboutWillard R. Brumbaugh, LUTCF Expertise I have answered many questions regarding 401ks, IRAs and annuities as well as life insurance.
I have been counselling against most Qualified Plans since 1994.
Experience Ranked in the top 5 in retirement catagories at Askme.com most of its last 2 1/2 years. Organizations I belong to:
National Association of Insurance and Financial Advisors-California
Inland Empire Estate Planning Council
Education/Credentials Life Underwriters Training Council Fellow
Question I am wondering if it is better to liquify some of my retirement in order to pay off debt. I'm going to try and anticipate some of the questions you may have for me. I'm 31, and my employer has a Simple IRA plan with a 3% match. I am currently putting in 3% just to get that match. Currently, I have $14k in my SIRA. I have credit card with a debt of $8k. I have one car payment (3 years left). I have a mortgage payment on my home, with not enough equity for a HELOC. I just figure I have roughly 25-30 years of retirement investment, and it sure would seem nice to have no CC debt...or at least reduced down to where it isn't so menacing. I would love to use that CC payment into a Roth or something that isn't tax deferred.
Answer Dear Matthew,
Whether or not it makes sense to divert your contribution from the Sep IRA to your credit card debt depends on how much interest you are paying each month and whether your employer's contribution is smaller or greater than the interest.
Suppose that your monthly income is $5,000. This would make your employer's contribution $150 per month. Eventhough you do not see the income tax on that deposit till years later, you still need to take it into account. Therefore at 20% that contribution would be worth to you only $120.
It is not unusual for the credit card interest to be 2% or more per month. On $8,000 that would amount to $160. It appears that you might be better off getting rid of the credit card debt as quickly as you can.
If you can cash out the SIRA, and you are in the 20% tax bracket, the tax and premature distribution penalty would be $4,200, thus leaving you with $9,800.
With the credit cards paid off, you can go back to contributing what is needed to get your employer's match; and you could then put what had been your credit card payments into a Roth IRA and/or high equity life insurance.
The 10% penalty on the premature distribution would be $1,400. The credit card interest for one year would have been $1,920. The income tax would eventually have to be paid anyway. So the tax has no bearing on the decision of what to do. Therefore, you might already be better off by $520.
You may be prevented from making contributions to the Sep IRA for one year, but you could add your 3% to the Roth IRA for that year. The possible loss of the employer contribution of $1,800 would be more than made up for by having eliminated the credit card interest beyond the first year.
