Dear Natalie,
I recently divorced and without the extra income of my spouse, I'm drowning in credit card debt. My credit card company just increased my interest rates to 28%. I'm struggling to make mortgage payments because the loan reset. The only good news is that I'm rich in retirement assets. Should I drain my IRA to pay off my credit card debt and get caught up on the mortgage, so I don't lose my home?
Yours truly,
Rob IRA to Pay Paul...
Dear IRA,
Even without knowing all of your circumstances, it's easy to see a few things. Your income and overhead are completely out of whack, and until that gets fixed, anything you do, including draining your IRA, will only be a temporary fix. Trying to duck tape your roof is a poor strategy when every day is a rainy day.
One of the most important considerations is that your retirement account is yours to keep no matter what, so draining your retirement account should always be the last resort. In the worst-case scenario, if you have to declare personal bankruptcy or give your home back, your IRA, 401K and other qualified retirement accounts are note included and may be the only assets you walk away with. If those accounts have enough money in them, it's possible that you'll be able to borrow from yourself to buy a new home, in a neighborhood that is more affordable for your current lifestyle. You won't be able to get a decent loan from a bank if your home forecloses or if you declare bankruptcy, so those accounts could be your lifeline!
What you need now more than ever is to rethink your entire game plan, especially with regard to expenses and income. If you have children, keeping the family home may be what you most desire. But, you have to ask yourself, is it worth it now to be cash poor and losing more each day to stay in this home? What is the best way to cut down the costs of your big-ticket items (housing, car, insurance, etc.) without sacrificing what matters most to you? Consider all options, including refinancing, loan modifications, relocating to a more affordable neighborhood or city, having a relative move in temporarily to help out, tapping low-cost equity to pay off high-cost debt, etc. FYI: Be careful of short sales because they come with phantom taxable income and the write-off is being resold to debt collectors, who will hound you to repay them.
Can you purchase a health savings account, instead of paying so much in premiums to the insurance company? That's one of the easiest ways to cut down on health care costs, while also increasing your assets.
If the problem is income, is it time to relocate to a place where the job prospects are better? Do you need to learn a new skill or trade? Is your small business paying you less than your employees? Did you fall for a get rich quick scheme?
Call your creditors now and commit to a payment plan for the next three months that is doable for you, while you figure out how to increase your income and decrease your expenses to a more healthy ratio - where bills are taking up 50% or less of what you make. Always put your agreement with the debt collection agency in writing, and include a letter documenting the agreement with each payment you make.
Debt obsession leads to more debt. Healthy savings habits lead to more assets. Place yourself first, not the debt collectors and not the banksters. The only way you will ever get out of debt is through careful strategy, wise investments and increased assets -- not draining all of your assets to buy yourself a few months. Being religious about paying 10% of your income to your tax-protected (and debt collection protected) retirement account (IRA, 401K, etc.) even now increases your net worth, which allows you to pay down your debt more quickly, on better terms.
Act honorably and quickly to achieve a sustainable, thriving lifestyle and to resolve the situation with those whom you owe money to.
About Natalie Pace:
Natalie Pace is the author of You Vs. Wall Street and host of the Pace and Prosperity radio show on BlogTalkRadio.com/NataliePace. She is a repeat guest on Fox News, CNBC, ABC-TV and a contributor to HuffingtonPost.com, Forbes.com, Sohu.com and BestEverYou.com. As a philanthropist, she has helped to raise more than two million for Los Angeles public schools and financial literacy. Follow her on http://www.facebook.com/pages/NWPace, and on YouTube.com/NataliePaceDOTCOM. For more information please visit, http://www.nataliepace.com.
Please note: do your research and consult an experienced, reputable financial professional before buying or selling any security, and consider your long-term goals and strategies. Consult a tax specialist or IRS.gov to learn more about Health Savings Accounts, IRAs, individual 401Ks and more.