Should I pay debt with my IRA? or should I invest the IRA?

[Adriana Vergara]

Hello ALl! first post here... My name is Adriana Vergara, I´m 35, single, no kids. Journalist background (worked in CNN for 8 years) I Now I have a soccer school in Atlanta GA, and also I became an apprentice in real state thanks to COVID and my boyfriend.

I´m trying to Straiten the boat here, to be able to start buying real estate...

So....

- I´m $34,373 in debt on credit cards. (I know.. it just happened and now it's time to make things right).
- At the same time, I have an IRA with a $68,806 net worth.

I have spent the past year helping and learning with my boyfriend who´s a realtor and who 4 years ago started doing flips. I have spent the past months reading, learning, listening to podcasts, youtube channels. etc.. and definitely I know I want to do this, I want to start with something, so one day I can talk about my own rental portfolio.

I have never bought a house before, so I still have that option to buy with a 3 or 3.5% down, but of course, my DTI is just too high...

So... the question is... Should I withdraw part of the IRA to:

• A- Pay the total of your debt!
• B- Pay part of the debt (at least leave it in 30%) and use the rest for a downpayment
• C- Don´t use your IRA money to pay the debt! just find the way to use someone else's credit (I have that option as well) you put the down and go 50-50 with that person on the property
• D- YOU have no idea what are you talking about, TRY TO DO THIS INSTEAD (please give me some suggestions!!!)

Here´s the breakdown of my cards:

• AMEX - $19,135 (I have an installment plan, at 7.99% APR, they won't close my account when I pay off the card) (credit line 22K)
• VISA WellsFargo - $6,865 at 21.99% APR (credit line $7,350)
• DISCOVER - $3.369 at 11.99% APR (credit line 7k)
• CHASE Freedom - $5,003 at 22.99% APR (credit line $5,500)

I have no more savings.

About my income: I pay myself around 3K a month and I get a 20% commission on every transaction when helping my boyfriend representing sellers and buyers.

I'm so compromised with this, that I just sold my car (I had a loan for 19k and got 20.5K for it) I know I can deal without a car right now and I want to lower down my monthly expenses to see where else I can put my money.

So... is it a good idea to use the IRA money to pay debt? or how else can I use it?

PS. I already know about the 10% taxes that I'll get charged if I decide to withdraw from the IRA, I know that I will pay a penalty (not in the first 10K if I use them in a first house). But hey... I'm just trying to find a way to start from 0 or to at least do something.

Thanks all for reading all this way!! In advance, I appreciate all the comments and suggestions.

Best regards.
Adriana.

[Dan Schwartz]

@Caroline Gerardo BUT, since you are self-employed you could open a solo 401(k) and roll your IRA into that. Then you could take a loan of 50% or $50,000 (whichever is less, but in your case will be 50%, or the $34K you need) from the 401(k) and apply it to your credit card debt. I think (and @Dmitriy Fomichenko could fill in or correct the facts here) that you will need to amortize that loan over 5 years and charge yourself a fair interest rate.  That said, the interest rate will be less than all of the above credit cards, especially the non-AMEX ones.  Your payment on a 5 year amortization will be high, but it might be the hurdle you need to jump in order to both free yourself from this situation AND have a monthly payment in your budget that you'll be able to re-direct productively once you've paid off the loan.

You are currently paying $382 a month in interest alone.  To make a 1% minimum monthly payment, you are paying another $343 in principal, and it will take 20+ years to pay it off (I haven't done the math, but your statements will show you this.).  That's north of $700 a month, which is higher than your 401K loan payment would be at 3.25%.  And at 3.25%, your interest costs would be less than $100 a month and falling, with 85% or so of your payment going towards principal payback that you can get working for you again in your 401K.

And, the 50% of the 401K you didn't loan to yourself will still be working for you in whatever investments you choose.

So what if this takes 5 years?  At the end you are debt-free, have $700 a month in your budget to invest as you please, you haven't lost 30% or more of your capital to taxes (remember that the amount you withdraw is also income and will affect your tax bracket!), you haven't forfeited your retirement account to pay off your 30-year-old-self's debts, and you should be ready to rock!  Just never put something on a credit card again that you don't intend to pay off at the end of the month, regardless of the teaser rate or the rewards offered.

Good luck!

Edit: you might not be able to open a solo 401(k) depending on the nature of your soccer school business.  Namely, if it has employees.  But, you could look at creating a 401K plan for you and your employees and doing the same thing outlined above.  It's a different beast, but done right it will still be well-worth it.  I don't believe you HAVE to match employee contributions unless you are looking to safe harbor your own contributions to the 401K.  So, maybe you could create it, offer it to the employees, make no contributions yourself (for now, at least), and implement the above strategy.  It would go through your custodian at that point, since it wouldn't be a solo 401K.