I'll get right to it. I have about 50k in debt and I just inherited a traditional IRA worth about 80k. Out of all my debt, only about ~9k is "high interest". I'll list the rough APR below:
- ~10k (car) @ 5.89%
- ~15k (motorcycle) @ 8%~
- ~2.1k (PL) @ 15%~
- ~2.5k (PL) @ 17%~
- ~4.2k (PL) @ 17%~
- ~8-10k @ 0%
- ~5.7k @ 36%
- (CC) ~2.7k @ 33%~
Knowing all of this, I'm thinking about taking out roughly 13k to pay off the 36%, my CC, and some of my lower balance loans. I am currently struggling financially to pay all of my bills, which is why I'm considering this.
My question to you guys is pretty simple, would it be worth it? My reasoning for this is because if I were to take out that money, it would be taxed at 22%. I'm salaried and make just enough to fall into that tax bracket for any extra income. So if it is taxed at 22%, it would make sense to pay off the loans that are higher than that, right? This might be a stupid question but I'm trying not to pull the trigger on anything on a whim, so any insight would be appreciated.
Also, because it is an inherited IRA, I do not have to pay the 10% penalty for drawing before whatever age. Lastly, this is for US, and all monetary amounts are in USD.
Thank you.
Inherited IRA and whether to pay off current debt
byu/swigginwhiskey inpersonalfinance
Posted by swigginwhiskey
3 Comments
Consider prioritizing the highest *interest rate* debt first.
Use a calculator like http://www.unbury.me to help you visualize this.
Consider resolving the reasons for accumulating the debt. Otherwise you are at risk of ending up in the same position. Except this time without an Inherited IRA to bail you out.
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Sounds like you are asking about a framework for what to do with money.
Start with reviewing the Prime Directive in the PF Wiki. It will answer your question and many other questions you didn’t realize you should be asking.
* https://www.reddit.com//r/personalfinance/wiki/commontopics
Take out what you need to pay off the 15%+ interest rates right now. You could consider some of the motorcycle debt as well, but personally I would hold off on that. Understand that you’re going to owe taxes at your marginal rate (or higher if it pushes you into the next bracket) on all of the funds withdrawn. If you have them take taxes out, it’s typically 10% and you should probably expect to owe another 12% on top of that. You can withdraw next year to pay your taxes on the money withdrawn this year. I would avoid taking all of the money out at once.
While “high interest” is a subjective term, I’d say you have $42.2k of debt that needs to be paid off ASAP. Anything over 5-6% is concerning. Anything over 8% is *very* concerning.
However, before rushing to payoff the ~$42k in debt, I’d strong recommend creating a budget and getting your expenses in order. It’s concerning to see someone financing a ‘toy’ like a motorcycle. Also concerning to see 3 personal loans. Slightly concerning to see an outstanding CC balance. More concerning to see rates at 33% and 36% as this suggests slow credit and/or possible poor decision making.
Maybe there’s a completely rational, no-fault-of-OP reason why this scenario exists. But on the surface, there’s a lot of yellow flags here.
Make absolutely sure whatever led to the current financial situation is fully addressed before proceeding.