Early IRA Withdrawal
I recently heard that if you possess high-interest credit card debt (25-30%) it makes sense to take an early withdrawal on a poor-performing IRA (currently a -10% return, but on average a 4.5% year return). I’ve worked the numbers, and realize an early withdrawal would implicate taxation (25%), and also an additional 10% imposed by the IRS. Since the IRA is performing so badly (-10%), does it make sense to make a withdrawal?
Permalink Submitted by Alan Spross on Wed, 2008-04-23 03:59
It would be about a break even if you assume the IRA is going to continue to produce a negative 10% or worse return. But why would you assume the return is going to continue to be negative when all historical patterns suggest otherwise?
Permalink Submitted by T Novika on Wed, 2008-04-23 04:24
Thank you for your reply. My calculations may be off; if so please feel free to comment: I was calculating total IRA taxation of 35% – 7% (average return since inception) = 28% loss for early withdrawal. So, a withdrawal would only make sense if bad debt interest rates are past 28%, per averages.
Permalink Submitted by Bruce Steiner on Wed, 2008-04-23 21:25
It doesn’t make sense to borrow at 30% to invest at -10%. Someone in that situation may want to consult with a financial planner.