Veteran Services: Finance Questions

Finances

You're working, and you've got a family that depends on you - both now and down the road. Where do you invest your money? Do you borrow against the equity in your house? Through a preferred provider relationship with USAA, The American Legion can provide expert financial advice to just about any question.

Questions & Answers

« Back to Finance Questions & Answers

Financial Questions & Answers

Question:

I have approximately $30,000 in credit-card debt, with an average interest rate of 15 percent. I also have two tax-deferred IRAs worth approximately $250,000. My effective federal income rate is 11.6 percent. Should I take a distribution from my IRA to

Answer:

$30,000 of 15-percent credit-card debt is clearly not good. It’s about four times the national average. A very important first step is to take an honest look at how you got to where you are. Was it an isolated bit of bad luck, or habitual overspending? If the latter, regardless of what you decide to do about paying off your current credit-card debt, you definitely need to develop a budget and live within your means. I believe abiding by a budget is an absolute key in becoming and remaining financially successful.

So, you’ve squirreled away a nice nest egg, theoretically, to support retirement lifestyle expenses. That’s great, but you may have to spend a chunk now. After mapping out your budget and committing to living on that budget for the long term, (while it pains me to say this) you may want to consider to moving forward with your plan to pull money from your IRA to pay off the debt. However, you may be surprised at how much this could potentially cost you, due to the loss of tax-deferred compounding and income taxes. Based on the numbers you provided, it would appear the full distribution would be taxed at 15 percent (your marginal tax rate), so to get $30,000 you’ll initially bump your tax bill by around $4,500. But here’s the kicker: If you’re younger than 59 ½, you’ll also pay a 10-percent penalty, adding another $3,000 to your tax bill. Depending on your current income, you may also bump yourself into a higher tax bracket, which may cause you to lose certain deductions. Getting out from under the 15-percent interest rate and getting back on track may be worth the cost – but only if you know that you can and will keep those balances at zero going forward. As with any significant financial decision, evaluate your own financial circumstances carefully before making a decision, and consult with your tax, legal or estate-planning professional. Good luck.