Q: My husband is 80 and I am 72. Our only asset is his IRA, which is worth $30,000. Our total income from Social Security is $1,630. We also withdraw $300 a month from the IRA. We have $7,000 in credit card debt. Would it be wise to take $7,000 from the IRA to pay off the cards? -- CS, via email
A: I don't think so. A $7,000 IRA withdrawal wouldn't be taxable in your case, but it would take a huge bite out of money that you need for your basic living expenses.
For younger people, paying off credit card debt is a high priority. A big balance hurts your credit score, making it harder to rent an apartment, to get a mortgage or a car loan, even to land a job. Paying off debt is also important for older people who can afford to leave an inheritance for their children. When you die, your debts are paid out of your estate. Depending on your assets (some are protected from creditors) that can mean less for your survivors.
But tapping an IRA is a very expensive way for most people to pay debts because IRA withdrawals are taxable.
Your situation is quite different.
You have no taxable income, says Barry C. Picker, a Brooklyn tax accountant and financial planner. Social Security benefits aren't taxable to a married couple filing jointly whose your annual 'provisional income' is less than $32,001. 'Provisional income' is half your Social Security benefit, plus all your other income -- including tax-exempt income, pension income and withdrawals from your retirement accounts. Your provisional income is $13,380 -- $3,600 from your IRA plus $9,780 (half your Social Security benefits).
Even if you increase your IRA withdrawal by $7,000 this year to pay off your credit card debt, your 'provisional income' would only be $20,380. So your Social Security income still wouldn't be taxable; and the tax on the $10,600 IRA withdrawal would be more than offset by your personal exemptions and standard deduction.
But your risk isn't a credit history that will prevent you from getting a mortgage, a job, or a student loan. Your big risk is running out of money. If you paying off your debt with 25% of your IRA, you'll probably be forced to run up new credit card balances just to cover your living expenses.
In your case, it's wiser to keep making minimum, on-time credit card payments. (From a card issuer's viewpoint, your minimum payments have value. They're predictable cash flow.) The worst-case scenario: The issuer might raise your interest rate, which would boost the minimum payment, says Greg McBride, senior analyst at bankrate.com, a personal finance website. But that's a risk worth taking, he adds.
You should also know that New York law protects your husband's IRA from his creditors. Even if he filed for bankruptcy, they couldn't seize any part of the account to pay his debts. And if you inherit the IRA as his beneficiary, it will enjoy the same protection from your creditors.
Under current New York law, a spouse is the only IRA beneficiary who gets that protection. The law doesn't actually protect inherited IRAs from creditors, says Seymour Goldberg, a Melville estate lawyer. Spouses are the exception because an IRA left to a spouse isn't considered an inherited IRA. The reason: You can roll your deceased spouse's IRA into a brand-new IRA of your own. By contrast, a non-spouse beneficiary must maintain an inherited IRA under the name of its deceased owner. Goldberg says anyone wishing to leave an IRA to a non-spouse who may be vulnerable to creditors can protect the account by leaving it to an irrevocable trust for that person's benefit.