Cashing out a retirement plan is no way to pay off credit cards

Q: My wife and I have about $30,000 in credit-card debt, built up over about 15 years. I know it sounds terribly irresponsible, but you'd be amazed what you're willing to spend on a growing family. I have about $22,000 in a 401(k) retirement account. Would I be better off cashing that out, taking the penalty and tax hit, to pay down the credit-card debt?
J.F., via e-mail

A: Don't withdraw assets from the 401(k) to pay off credit-card debt, says Steven Morris, a certified financial planner and CPA in Atlanta. "The tax hit is just too high" – easily 31 percent (for those in a 15 percent federal income bracket) to more than 50 percent of the amount withdrawn.

One possibility, if the plan allows, is to borrow from the 401(k) balance to pay down the highest interest rate credit cards, Mr. Morris says. Some plan sponsors will allow participants to borrow as much as 50 percent of the balance. That loan will have to be paid back within five years, however, to avoid treatment as a distribution. But you'll be paying yourself rather than a credit-card company.

Q: After my husband passed away, I tried to collect his Social Security. They told me I had to wait until I was 50. Then they told me age 52, and at age 52, they told me 60, which is approaching pretty soon. Has the law changed again, or can I apply for this then?
L.B., via e-mail

A: Normally, the earliest retirement age is 62. But for widows, Steven Morris, a certified financial planner in Atlanta, says that it's age 60.

For more guidance on this, he points you to the website of the Social Security Administration: http://www.socialsecurity.gov/ww&os2.htm

Q: I will turn 70-1/2 in March. If I have interpreted the IRS rule correctly, I will have to take a minimum distribution from my IRA by April 1, 2008, and every year thereafter. Does that not mean by April 1, 2009, or any part of 2009?
P.W., Belmont, Miss.

A: While the first distribution is due in 2007, you technically can wait until April of 2008 to take it. But there's a wrinkle, according to Patricia C.

Brennan, a certified financial planner in West Chester, Pa., and president of Key Financial Inc.

"It is very important for you to know that if you do wait until 2008, you have to make two required minimum distributions in that same year," says Ms. Brennan. So you may want to calculate whether doubling up in 2008 bumps you into a higher tax bracket.

If it does, she says that you may want to stagger the distribution. Each year thereafter, you'll have until Dec. 31 to take your distribution. So it can be done at any time during the year.

But here's another complication: The custodians of your money get very busy at this time of year, and often implement cut-off dates. So check with them earlier, rather than later, to make sure you can make a withdrawal in a timely fashion.

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