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Author: armarrujo Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121185  
Subject: Closing my IRA to pay down debt. Date: 6/8/2000 9:05 PM
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My wife and I just had our second child. we are in our mid 20's and fell really behing in our debts. I do not want to file bankruptcy. Collectors are calling everyday, they don't even want to hear my story. Can I close out my IRA and pay the taxes when I file for 2000. Instead of paying taxes now? what should I do?
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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 36421 of 121185
Subject: Re: Closing my IRA to pay down debt. Date: 6/9/2000 1:12 AM
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My wife and I just had our second child. we are in our mid 20's and fell really behing in our debts. I do not want to file bankruptcy. Collectors are calling everyday, they don't even want to hear my story. Can I close out my IRA and pay the taxes when I file for 2000. Instead of paying taxes now? what should I do?

I'd do my level best to find some other way to keep up with the debt service. If you take the money out of your IRA, you'll have to pay income taxes on it (assuming it a traditional IRA and not a Roth) PLUS you have an additional 10% penalty on the amount withdrawn PLUS you may also have state income taxes and early withdrawl penalties. For example, here in California, the total taxes will eat up about 1/2 of what is withdrawn.

And to make matters worse, the IRA custodian will not withhold any taxes unless you specifically request it and they agree to do so. That means you'll have to keep enough on hand to pay the tax next April. Should you fail to do this, you will find out what a really nasty bill collector looks like. Our big Uncle doesn't bother you with phone calls. After a few increasingly dire letters over 3 or 4 months, he'll simply levy your bank account and/or garnish your wages. After the garnishment, you'll have about $150 - $200 a week to live on (and pay the other creditors with) until the tax debt is cleared up. Not a pretty picture.

Now for some positive advice. You're right that the bill collectors don't want to hear your story. They want to hear how you will repay the debt you've run up. So you need to sit down with your wife and ALL of your bills and make up a budget you can live within. Find an amount you can pay to the debts on a monthly basis, then divide that up between the bills you have. Tell the creditor what you can pay, ask for a reduction or elimination of your interest rate, and start paying them.

This is a lot easier said than done - I know from my personal experience. But you've got to start right now. There's a lot of help available here at the Fool. Check out the Living Below Your Means board, the Credit Cards board, and the Managing Your Debt Collectors board. There are a lot of encouraging stories there along with some good advice from others who are in the same boat as you.

My best wishes for you as you begin this war on debt. You can beat this debt monster.

--Peter

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