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Imagine getting a note like this:
We’re 67 and 66, both retired, and we owe $28,000 on credit cards. We have about $150,000 in IRAs and a paid-off house.
A friend says cash out the IRA. Our bank says take out a home equity line. And a radio ad says a company can settle the debt for less. What should we do?
Let’s say it came from a couple we’ll call Walt and Joyce. They’re made up, but the dilemma is real.
Americans owe $1.26 trillion on credit cards, and the New York Fed says new delinquencies on cards “remain at elevated levels.” (1)
At commercial banks, accounts that are charged interest were paying an average of 22.36% in August, according to the Federal Reserve. (2)
I’ve been a CPA since 1981, and I once served on the advisory board of a local Consumer Credit Counseling Service. So here’s how I’d sort through Walt and Joyce’s 4 options, and the tax traps in each.
1. Cashing out the IRA: the fastest fix with a tax bill attached
At 22.36%, $28,000 costs about $6,260 a year in interest, by my math. Paying it off with IRA money sounds smart. But money in a traditional IRA generally isn’t taxed until you take it out, so withdrawals count as taxable income. (3)
To net $28,000 if every dollar were taxed at a 12% federal rate, they’d need to take out about $31,818, and that’s before any state tax.
There’s a second hit that’s easy to miss. Social Security becomes partly taxable once a couple’s combined income tops $32,000 a year on a joint return. (4)
The IRS test adds half your benefits to your modified adjusted gross income, and taxable IRA withdrawals raise that income. (5) So a big withdrawal can get more of your benefits taxed, too.
My read: if you use the IRA, spread withdrawals over more than one tax year so you don’t jump into a higher bracket. And ask for withholding, so April doesn’t bring a second surprise.
2. A home equity line: lower rate, but your house is on the line
My read: a HELOC usually costs less than a credit card, because your house backs it. But the Consumer Financial Protection Bureau doesn’t sugarcoat it: “If you fall behind or can’t repay the loan on schedule, you could lose your home.” (6)
It also notes that HELOCs usually have a variable rate, so your payment can change from month to month. (6)
Walt and Joyce got into this mess with unsecured debt. Turning it into debt secured by the one asset they can’t replace is a big step. I’d only do it with a firm plan, and the discipline to stop using the cards.
Quick gut-check — if your money advice is coming from random online influencers, you’re playing a dangerous game. I’ve been a CPA since 1981 and writing about money since before the internet existed. Sign up for the free Money Talks Newsletter and get expert advice that’s been tested by time.
3. A personal loan: a middle path that doesn’t touch the house
There’s another option that keeps the house out of it. At commercial banks, the average rate on a 24-month personal loan was 11.90% in August, according to the Fed, a little over half the average card rate. (2)
The catch: you still have to qualify, and the payment is fixed, so make sure it fits your monthly budget.
Credit card balances at 20%-plus can feel like a treadmill — minimum payments barely touch the principal. A personal loan rolls those balances into one fixed monthly payment, often at a lower rate, with a set payoff date instead of a revolving cycle.
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4. Settling the debt: real relief, with strings attached
Debt settlement means paying less than you owe. It can work, but go in with your eyes open.
The CFPB warns that not paying your debts while you try to settle them “can lower your credit scores” and can add late fees and interest. It also says charging a fee before settling at least one of your debts “is illegal for most debt settlement companies.” (7)
Then there’s the tax angle a radio ad may not mention. The IRS says, “In general, you must report any taxable amount of a canceled debt as ordinary income” on your tax return. (8) There are exclusions, including debt canceled to the extent you’re insolvent. (8)
Example: if $10,000 is forgiven and it’s all taxable at 12%, that’s a $1,200 tax bill.
Before settlement, I’d call a nonprofit credit counselor. The CFPB says counselors can help set up a debt management plan and may be able to lower your payments by stretching them out, and get creditors to stop charging late fees. (7)
If counseling isn’t enough and the balance is large, I’d look at settlement next.
If you have $15,000 or more in unsecured debt, National Debt Relief is one of the most established debt-relief providers in the U.S. They’ve helped over 500,000 people, hold an A+ BBB rating, and are top-rated by ConsumerAffairs, Top Consumer Reviews, and others.
How it works: fill out a quick form, and a certified debt specialist will review your situation. If they can help, they’ll build an affordable plan and estimate when you could be debt-free. There’s no upfront fee and no obligation to get started.
One more thing: your Social Security is protected
Many retirees in debt worry that a collector will grab their check. Generally, a collector has to sue you and win a judgment first, and even then, the CFPB says two months’ worth of benefits directly deposited into your bank account are protected. (9)
The exceptions are money you owe the government, such as back taxes or federal student loans, and child or spousal support. (9)
My honest take
If I were Walt and Joyce, I’d start with a nonprofit credit counselor, then compare a personal loan. I’d use the IRA only in pieces, and I’d think long and hard before putting the house on the line.
Whichever path you take, put the cards away. Paying off $28,000 only to run it up again is the most expensive mistake on this list.
And don’t be ashamed to ask for help. Debt is a math problem, not a character flaw, and math problems have answers.
Sources: 1. Federal Reserve Bank of New York; 2. Federal Reserve; 3. Internal Revenue Service; 4. Social Security Administration; 5. Internal Revenue Service; 6. Consumer Financial Protection Bureau; 7. Consumer Financial Protection Bureau; 8. Internal Revenue Service; 9. Consumer Financial Protection Bureau
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