Advice on Using Investments to Payoff Debt
We have tax deferred investments which equal our credit card debt. Would it be wise to cash these out and pay off the debt?
We have tax deferred investments which equal our credit card debt. Would it be wise to cash these out and pay off the debt? My husband and I are both about 50.
Thanks for your question. I would generally advise against using retirement investments to pay for credit card debt (you mention tax deferred investments so I am guessing its most likely 401(k) or an IRA). At age 50, both of you are closing in on the retirement age and you will need these investments to fall back on. Another issue that you may probably have to deal with is the 10% penalty tax for early withdrawal.
Nearly every tax-deferred investment has some sort of a penalty attached for early withdrawal. As mentioned, the penalty for a 401(k) is a whopping 10% and this is in addition to applicable income taxes. See the Internal Revenue Service (IRS) document 401(k) Resource Guide - Plan Participants - General Distribution Rules and Publication 590, Individual Retirement Arrangements (IRAs) to learn more.
You also need to take stock of you how much your investments are earning for you and how much interest you are paying on the credit card debt. For example, with the stock market, you can only reasonably expect to make around 9%-15% per year, based on the historical performance of the market. When you pay down your debt, you are guaranteed to save yourself whatever interest rate you are paying. Therefore, if your choice is maybe 9%-15% gained on the stock market, or paying off your 14%-29% APR credit card debt, go with the guaranteed win and pay off the card, but make sure that you have funds available for your retirement.
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