Partial Early Withdrawl – Why I Chose This Route

As I mentioned from my January wrap up, I had some unexpected expenses last month and I didn’t have a way to cover them without robbing Peter to pay Paul. In this instance Peter was either B or my mom and Paul was the dentist and the credit card company.

In the bigger scheme of things they were not that expensive. However, all these little expenses I was not prepared for were literally nickel and diming me to death.

I just could not get ahead.

I had been struggling for a few months to get a bunch of little debts [less than $500 each] paid off so I could finally build up my savings and be more prepared in the event unforeseen expenses popped up. The problem was that a bunch of small debts means I could only put $25 a month toward each and it would take quite a bit of time to pay them off. Having lower credit [due to bankruptcy because of divorce after having good credit] and no savings leaves little options aside from “bank of mom” or “bank of B”. As much as it is nice they are willing to help me out, I was tired of relying on that when something unexpected happened. I also had some other expenses coming up that I needed to ensure I could pay for.

I needed a way to set myself up for success.

I looked in to getting a loan against the QDRO monies I received as part of my divorce settlement. Something I could pay back within the year and give me some much needed breathing room. Unfortunately that was not allowed on the plan. The only way I could access any of the money was to take an early withdrawal and roll the remaining amount in to an IRA.

I ran the numbers a few ways depending on how much I wanted to withdraw. Twenty percent is taken out and sent to the IRS on my behalf. It was a small hit compared to the bigger picture. It would be a taxable event for 2015 so I would not be responsible for any other taxes [if there was any depending on my tax bracket] until 2016 which I could prepare for over the year. Because the money came from a QDRO I was not penalized an additional 10% which was a nice break.

My choices at this point were three:

  • Suck it up and come up with a way to pay the dentist.
  • Take the minimum I needed
  • Take a little extra to pad my savings, pay off a couple smaller debts leaving me to be able to direct even more money to my savings earlier.

Normally I would just suck it up and figure it out without dipping in to retirement. However, I have done that a few times over the past several months and was super tired of “the unexpected”. Was I willing to take a hit on my retirement in order to help myself out of my current situation?

The short answer: yes.

For the record, I discussed it with B and he was against it. He said we would find a way. I kept wondering what would happen next time and I would be back at this point of the generosity of family/friends.

Ironically the credit card I just received in January increased my credit limit. That would have allowed me to pay off the dentist but at a higher interest rate. Of course I found this out today and made my decision last Friday to withdraw money. Nothing I can do about it now.

You can argue all you want but in the end, I feel good about my decision to take some money out early. Ready for this year to get ahead!

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