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QUESTION:

I have 14K in a deferred comp account (457) from a previous employer.  I just found out that since I'm separated from service, I can't take out a loan (to pay myself back in 5 years, it was my preference for retirement.)  I have been "under employed" for the last 2 years, relying on a credit card to help out now and then.  I missed a payment, and the interest rate was bumped to 30% (ack)!  Now that I have a better job, I did a balance transfer to stop the interest rate, transferring it to another credit card with a lower interest rate (I only have 2.)  The question is:  Should I take a partial distribution to pay down the transfer?  I have until June 2012 before I have to pay interest, so I can wait until then, but I'd like to get my financial affairs in order at this time to make my debts more manageable with my better (although still small) salary.  Thanks!
Should I...Pay Down the Credit Card?

ASK YOUR MONEY’S ROSEMARIE BOYD ANSWERS:

Dear “Pay Down the Credit Card:”

At this time I would suggest trying to pay down the debt with excess income, if you have any.  While you are doing this, pay attention to interest rates to make sure that your rate isn’t rising.  Given the fact that we are in a low interest rate environment, which will most likely continue for some time, this should work our well for you.  If you still have a credit card debt at retirement, you could make a withdrawal at that time because you will most likely be in a significantly lower tax bracket.

Making a partial withdrawal could potentially present a problem because the entire amount of the withdrawal would be added to your taxable income.  However, a withdrawal might make sense if you are in a low tax bracket.  Remember, in addition to taxes, if you are under 59 ½, you will also have to pay a 10% surcharge on your withdrawal.  

To make sure that you are making a wise decision, ask your tax advisor to help determine what the potential tax liability might be, were you to make a withdrawal at this time.

Thanks for your question,

Rosemarie A. Boyd, CFP

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