Liquidating IRA for debt reduction/cash flow after Permanant Disability

Asked October 24, 2013, 4:11 PM EDT

Should I look into liquidating my IRA account to pay off debt, allowing me more cash flow from my fixed disability monthly income? Isn't there an IRS form I can fill out to avoid a tax penalty due to being disabled? If so, I believe paying off my first mortgage, even though the rate is lower than other debt, would free up my earnings because it is the one debt costing me the most monthly. I can then pay more than the minimum payment on other high rate credit accounts and significantly reduce my overall debts faster, while having the additional cash flow to afford basic necessities in life. My entire income is being consumed to pay bills and household expenses. I have budgeted and reduced spending and it is just exhausting never having a dime left in my pocket for anything.

Los Angeles County California

3 Responses

Hi, there!

This is a multi-faceted question that certainly requires teasing out some priorities and considering in the context of your relative place in the life cycle and lifestyle needs and wishes going forward.

To this end, before I answer, can you tell me 1) approximately how old you are and 2) whether or not your "fixed disability monthly income" means that you can not or will not ever assume any additional income from a part time disability-sensitive type of work? Also, you mention "paying off my first mortgage," can you tell me whether this means you also have a second or third mortgage loan against your real property?

With this additional information, I should be able to provided a much better answer than I would otherwise. Thanks!

1) approximately how old Answer is I am 54 years old
2) whether or not your "fixed disability monthly income" means you can not or will not ever assume any additional income from a part time disability-sensitive type of work.

Answer: At this point I cannot.assume any additional part time work in my future.

Can you tell me whether this means you also have a second or third mortgage loan against your real property?

I had a Home equity Line of Credit for 60K that was modified to a principal reducing lowered Interest loan with a current rate of !%, increases to 2 %, ect on a agreed schedule. My balance is about 55K. . I just had to agree to close the line of credit for the reduced payment deal. Payment is $184.25 a month.
My First has a much lower balance but the payemts are more. So I would just have to set aside $306.25 into an escrow account on my own to pay with the taxes and insurance plus the $184 on the Equity line. The combined amount I currently pay on my home is approx. $ 1000/mo afterwards it would be $490.50 monthly. that gives me about $500/mo for my budget needs.

I cannot see any other way out without being able to work at this time.

Disability is one of nine situations where penalty-free IRA withdrawals before age 59 1/2 may be allowed. See http://www.investopedia.com/articles/retirement/02/111202.asp. There are very specific rules, however. Check with your IRA custodian for additional details.

Since you are having trouble making ends meet, there are several national resources that might be able to assist you with managing your finances during times of financial distress. The HOPE NOW Alliance includes a number of credit counseling organizations that provide credit counseling, debt management, and foreclosure prevention counseling services. To find a HOPE NOW credit counselor in your area, see www.hopenow.com. Another national resource with local connections is 211. Either call this number or go to www.211.org. Individuals calling 211 are able to speak to a trained information and referral specialist to find out about specific community resources in their area. Another source of information about community services and public benefits is your local Family Services (also called Social Services) office.