IRA Distribution vs. Credit Card Debt?

Hi All! I have a finance question thats possibly quite simple for those financially or mathematically inclined. Alas, I am not one of those people!

Okay. I was recently laid off and have a chance to take an IRA distribution. Doing so would mean having 20% withheld for income taxes. Thus of the $12,000 I have saved, I would only see $9600.

Normally I wouldn't take this 20% hit, but I currently have about that amount in credit card debt. The twist is that the APR on these cards averages MORE (about 24% APR) than the income tax withheld. Should I take the distribution and pay off my $9600 in credit card debt or rollover the IRA once I get a new job?

*NOW, I know I'll be hearing much about the extended future returns of the IRA. I'm 28 and would only be forefieting the 1st 3 years of a lifetime of savings. Assume I would start a new IRA right away. I have near-future plans (house, grad school) that would require vastly improved credit as well.

What's my best move?
Thanks!

payoff the credit cards

If the interest rate on the credit cards is that high, pay them off and cut them up so you don't use them again.

If you run up your cards after paying them off, then you just wasted $12,000.

Also, the 20% tax hit is used to pay the 10% early withdrawal penalty and the other 10% is used to help cover taxes. You will probably owe additional taxes of $1200 depending on your income.

When you start working again, take the time to prepare an estimated tax return based upon you income from your old job, the 401(k) withdrawal, and your expected earnings from your new job to see if you will owe any money for 2008 in 2009.

If you estimate that you will owe more than $1000, you will need to make an estimated payment to the IRS.

OK .if you cash out the IRA, then you automatically have charged yourself a $1,200 unnecessary tax in taking an early withdrawal. You have then made all this money part of your 2008 income, which might not be the worst thing this year if you aren't going to be fully employed. (Ask your financial advisor about rolling the money into a type of IRA called a ROTH. It depends on certain income tests, but there are cases that you can pay the tax now, and then when you withdraw the money in retirement, it's tax free - this is important when you see how that money will grow).

So if you are 28 now, that means the money would double when you are 37 to $24,000 and then $48M@ age 46, and $96M at 55, and $192M at 64. (that's the rule of 72 which says if you get an average of 8% return, the money can double in 9 years).

Now, at the same time this is all growing, if you are paying down your credit cards the amount of interest owed on them is consistantly declining - I understand that they are at a higher rate, but your diligence in paying down that debt more quickly will save you more in that interest. Also, at that rate, call the card issuer and ask for a reduction - or change cards to one that is more reasonable.

Bottom line, don't steal $192,000 from your long term retirement money to take care of a $9,000 short term problem.

I say to do both. Pay down the credit cards to where you can pay them off in 6 months time. The remainder I would re-invest into a new IRA. That way the debt is MUCH more manageable and you still will get the long term returns of the IRA.

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