Retired with CC debt - should I withdraw from IRA & 401K

Retired with CC debt - should I withdraw from IRA & 401K
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#1

I am 70 but still working. Pension, salary & SSA, wife’s salary net income about $125k with $580k in IRA/401k & $13k in stock. I have mortgage, HELOC and personal LOC totaling $240k, Parent Plus of about $190k and $73k in credit card debt.
Should I cash in stock and take withdrawal from IRA to pay of the CC debt.


#2

Hi @neil.colello and welcome to the forum!

Could you tell us more about the interest rates on your debt? On the surface, using some of your IRA money to pay off debt does seem like an option, assuming the interest rates are higher than the return you’re earning (I’d guess yes, but that’s why I asked about those rates). It also sounds like you will be subject to required minimum distributions on your IRA this year (assuming you have the traditional version and not a Roth), and your debt could very well be the best place to put that money. (Your RMD won’t cover the full amount, but it will make a dent.)

I might also suggest consulting a financial advisor at this point — age 70 and approaching retirement is a great time to do that, as an advisor can help you get a plan in place for tackling that debt and making sure your money lasts through retirement (and you’re making the most of what you have). Here’s some info on financial advisors and how to find one:


#3

Aoshea – Thanks for the response.
The credit cards vary from 15 - 25%.
Mortgage - 4.25% fixed
HELOC - 5.25% variable
LOC - 5.25% variable
Parent Plus loans - 7 - 8%


#4

I’ll echo what Ariel wrote. It’s super important to get an objective second opinion, because decisions made in and near retirement can have such a profound effect on how much money you and your wife will have to live on.

Some issues to think about:

Because you’re over 59-1/2, you’ll avoid the early withdrawal penalty, and as Arielle notes you will need to start RMDs next year anyway, withdrawing around 3.6% of your IRA. However, taking a larger one-time withdrawal (one big enough to pay off all the debt and cover the tax bill), could push you into a different tax bracket and dramatically reduce your savings for retirement. If your pension and Social Security payments are substantial, that may be a risk worth taking – but again it’s something you’d want a fee-only financial planner to take a look at.

Then there’s the Band-Aid-vs.-cure issue. Many people who tap retirement funds or home equity to pay off debt don’t address the problem or problems that caused the debt. Their spending continues to outstrip their income, and they wind up with more debt and less overall wealth.

This can be especially critical for older households as their income drops. A couple’s household income usually declines when each person quits work and drops again when someone dies, because one of their two Social Security checks goes away.

Once spending and income are aligned, however, other solutions may be possible. Downsizing is one option, or a cash-out refinance to pay off the lines of credit and credit cards and lock in fixed-rate payments on a 30 year loan. (This is something you’d want to do while still working, as it can be a challenge to get a mortgage in retirement.) Mortgages in retirement are now pretty common, and often preferable to depleting savings.

We hope we’ve given you some food for thought, but again, a fee-only financial planner could look at your entire financial situation and offer customized advice.