Dear Debt Adviser,
I was laid off from my job in February. I went on unemployment until my benefits ran out, and I still don't have a job. My husband works, but without my income, we can't pay our bills. To make ends meet, I took $10,000 out of my individual retirement account. But that's not going to last us very long. I'm 53, and I may not be able to get another full-time job, so I'm thinking of dipping into my IRA again. It worries me, though. Do you get hit with penalties when you use your IRA to pay debts?
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I'm glad you wrote to me before you took more money out of your IRA. What you need is a new financial plan, and this may or may not include early withdrawals from your IRA. Just because you're younger than the 59 ½ age limit doesn't mean you have to pay a penalty on your early withdrawal. I'll explain this later. First, though, let's do some financial replanning.
It seems you've concluded that you may never again earn what you did before you lost your full-time position. And you can't afford to wait to find out. Given that, it's time to match your spending to meet those new expectations.
I suggest that you start by documenting where all your money goes each month. You'll be surprised at how quickly you'll find waste and fluff. No one likes to reduce expenses, but it may be necessary to pay your bills. Additionally, if you are using your credit cards to extend your income, you must stop. Use cash or a debit card so you don't add to your existing debt load.
If you need help with trimming expenses, contact a reputable, nonprofit credit counseling agency at the National Foundation for Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies. A certified credit counselor will review your expenses and income and make suggestions on other budget cuts. A counselor also may help with lowering payments on your credit card debt.
If your bare-bones expenses still outstrip your income, you might consider taking IRA withdrawals to bridge the gap as long as it is a temporary fix. But watch out: If you keep taking money out of your IRA, you'll have a horrible retirement. As part of a short-term bridge, the Internal Revenue Service has rules that allow you to take early withdrawals from your IRA without a penalty.
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As a last resort, you might consider a Chapter 13 bankruptcy filing. This could help you keep your house, and your unsecured creditors would have to settle for what the judge believes you can afford to pay over five years. You must be sure, however, that you can afford your current mortgage and all other expenses with your new income level. If not, it might be better to sell your home and downsize your living arrangements.