Several people had questions about our decision to take money out of retirement savings to pay off our debt, so I thought I’d explain a bit more.
We didn’t take out a 401(k) loan. I don’t even think that was an option since I quit working for the company in 2011. Instead, we plan to commit to a certain amount of money every month to put in our Roth IRA. My husband is still employed with the state of Illinois, so he has 8% coming out of his paycheck every month and put aside for retirement. Over the last two years, that’s all we’ve been able to save for retirement. However, now that the credit card monkey is off our backs, so to speak, we’ll have money to set aside and put in a Roth IRA.
The hard part now is deciding how much money to set aside for retirement, for a car replacement, and for a down payment on a house. These are all fairly pressing and expensive financial events.
A number of people asked about the taxes. Yes, I am concerned about the taxes we’ll have to pay. When I got the check, the only thing that was deducted was the 10% penalty. So, immediately my husband and I took 15% of the total amount of the check before the penalty and put that in a savings account. That money is just there for safe keeping. I know that come tax time, I’ll probably have to part with all of it.
Another consideration is that the amount we took out of our retirement will count as income when we file our tax returns. That will make our gross income increase considerably from last year to this year. Still, last year we got a refund of several thousand dollars, so I’m hoping between the money we set aside from the check and the possibility that we would have gotten a refund this year, we’ll be set tax wise.
However, just to be sure, we’re also setting money aside for our Roth IRA, but we’re not investing any of that money until our accountant does our taxes. The plan is to fund our Roth IRA before March, 2014. Then the contributions can be deducted and lower our tax burden. We’re waiting to put that money in until next winter just in case we made need it to pay our taxes should the money we set aside not be enough.
I definitely don’t recommend that everyone raid their retirement to pay off debt. However, because our credit card debt was so high and our income just moderate, it would have taken us several years to pay it all off. We ran the numbers and realized that paying the penalty and taxes was still cheaper than paying years’ worth of interest on the credit card.