Should I use money from my 403(b) account to pay off my credit card debt?
I am 60 years old and plan to work for another 10 years. I have $22,000 in credit card debt. I have $85,000 in a 403(b) account. Should I take money out of my 403(b) to pay off the credit card? The credit card is at 16 percent interest and I am currently paying about $300-$400 a month in interest on the card.
While the credit card company charging 16% interest is annoying, taking money from your 403(b) or any other retirement account to get rid of the debt may negatively impact you financially. Even though you can take the money out without the 10% penalty, you would still have to pay taxes on the money. You would likely lose money on the deal based on how the math works. This is because you must take extra money out to pay taxes on the $22,000; then you have to take even more money out to pay taxes on the money for the taxes.
Assuming you are in the 20% tax bracket, you will need to take out $27,500 in order to pay the credit card bill and the tax on the withdrawal. This equates to the equivalent of a 25% cost to remove the money, much worse than the 16% per year the credit card is charging. You should also account for the opportunity cost of removing nearly a third of your retirement balance so close to retirement. (Since you have a 403(b) you may also have a pension, but this account really should be kept in place to supplement your retirement needs). Assuming a moderate 7% return over the next ten years, removing the $27,500 would equate to losing $54,000 when you retire.
Focus on Aggressively Paying off the Debt
You would likely be better off attempting to pay down the credit card debt out of monthly cash flow rather than removing funds from your retirement. Depending on how much money you can free up each month to put toward paying your credit card off, you could end up ridding yourself of the debt in less than a year and a half. Below are some examples of how long it will take and the total interest cost based on making four different monthly payments to your credit card.
$750 Monthly Toward Credit Card Debt
Cards paid off in 38 months
Total Interest: $6,500
While you are paying $6,500 in interest over this period, it’s only a thousand dollars more than the $5,500 in taxes you would pay for taking money from your retirement account. Additionally, your retirement account would be growing faster because you would have an extra $27,500 in the account. Assuming a conservative 5% return on your investments, you would earn more than $4k on your retirement funds by keeping the $27,500 in the 403(b).
$1,000 Monthly Toward Credit Card Debt
Paid off in 27 months
Total Interest cost: $5,000
If you can free up $1,000 a month you would pay $500 less in credit card interest than you would pay in taxes for taking money from your 403(b). And you would still retain the $4,000 growth in your retirement account assuming a 5% return.
$1,500 Monthly Toward Credit Card Debt
Paid off in 17 months
Total Interest: $3,500
Here you would save $2,000 verses the taxes on the 403(b) withdrawal.
To help you find ways to free up money, this article might also help you find ways to boost your monthly cash flow so you can pay down the credit card faster.