Would you cash in a retirement annuity for this?

[shelleyd]

Here is the situation. My dh and I moved to Canada from the USA this winter. Prior to this my dh was out of work since Sept 2008. My ILs have lent us approximately $8000. We are currently living with them now too but will be moving out in the next month or two. MIL just took out a car loan of approximately $8000 for us since we were unable to get approved. My husband is working now and we will be making the payments on the loan although MIL is anxious for us to pay it off ASAP.

So here is my dilemma- while I am very grateful for my ILs help, I am feeling very stuck in this situation. I do not like the fact that they legally own our vehicle and so have a say in what we do with it. I am anxious to pay them back all the money we owe them ASAP in order to move on from this difficult time in our lives and stand on our own two feet without being indebted to anyone. My dh has a retirement annuity account in the US. We have to either roll it into an IRA or cash it out (and pay pretty big fines for doing that) now that he is no longer a member of his former union. I worry about the tax implications down the line if we roll it into an IRA and then plan to bring that money into Canada. We are seriously considering cashing it in and clearing our debt with the inlaws in one easy go. Is this a really bad idea? I have a feeling that it is not a very wise financial move but I am so anxious to be out of debt.

Thoughts?

[zebra15]

You need to meet with a financial planner about not only the early withdrawl and lack of compounding but tax implications of that. There are options for rolling over retirement funds.

I understand wanting to pay off the family debt but *I* wouldnt do it at the expense of my retirement. Im guessing your MIL is DH's mom? What does DH say about paying mom back? Does he have the same feelings as you? Why not let DH handle his mom?

[velochic]

Originally Posted by zebra15

Im guessing your MIL is DH's mom?

That's a pretty good guess! (I'm just being facetious, don't mind me. )

Shellyd - cashing out retirement should only be in the most DIRE of emergencies... for example your child is in the hospital and they are refusing treatment unless you cough up some money right away. Never, never, never, never touch retirement. You can finance a million different things when you are younger, but you *cannot* finance your retirement. If you don't have enough to live on in retirement, you can't get a loan for it.

As much as it must pain you to be beholden to your in-laws, I would take it at face value - a kind gesture to help you get back on your feet when you are going through a tough financial time. I think it's wonderful that they are doing this for you. I would pay them off as you can and appreciate their thoughtfulness.

One more thought... you owe them about $16,000 right now, right? If you cash in your retirement, then it would be the equivalent of paying $22,400 for a $16,000 loan. The difference is the money you would lose by cashing in your retirement, and that doesn't even include any gains you might have on the money over the next X number of years before retirement. Do you really think it's a wise financial move to pay 40% interest on a loan? Nobody in their right minds would take out a loan with those terms... yet if you use your retirement money, it would be the same as taking out a loan with 40% interest (about what you'll pay in taxes and penalties).

Don't do it.

ETA: We have some investments overseas. When we have cashed them out, we've had to pay double taxes... in the country of origin and in the US when we brought the money over. That 40% might be a VERY conservative figure once you've paid US taxes and Canadian taxes... not to mention that the tax returns get very complicated. We usually pay between $800 - $1000 to get our taxes done when we've had to deal with taxes in multiple countries, so there's also that extra expense.

[shelleyd]

Thank you both for your replies.

Originally Posted by zebra15

You need to meet with a financial planner about not only the early withdrawl and lack of compounding but tax implications of that. There are options for rolling over retirement funds.

I understand wanting to pay off the family debt but *I* wouldnt do it at the expense of my retirement. Im guessing your MIL is DH's mom? What does DH say about paying mom back? Does he have the same feelings as you? Why not let DH handle his mom?

We are definitely going to meet with a financial planner. Dh is not as stressed about paying his mom back as I am but he is anxious to pay her back. He is willing to handle her however he is currently working out of town. He is gone from Sunday evening to Thursday evening. FIL is also working out of town but he doesn't even come home on weekends. So during the week it is just MIL and I here. It is inevitable that I have to deal with her and the financial issues. In general she and I have a close relationship. I would feel funny if there was something to be addressed and I never said a word and then dh did when he comes in town.

Originally Posted by velochic

That's a pretty good guess! (I'm just being facetious, don't mind me. )

Shellyd - cashing out retirement should only be in the most DIRE of emergencies... for example your child is in the hospital and they are refusing treatment unless you cough up some money right away. Never, never, never, never touch retirement. You can finance a million different things when you are younger, but you *cannot* finance your retirement. If you don't have enough to live on in retirement, you can't get a loan for it.

As much as it must pain you to be beholden to your in-laws, I would take it at face value - a kind gesture to help you get back on your feet when you are going through a tough financial time. I think it's wonderful that they are doing this for you. I would pay them off as you can and appreciate their thoughtfulness.

One more thought... you owe them about $16,000 right now, right? If you cash in your retirement, then it would be the equivalent of paying $22,400 for a $16,000 loan. The difference is the money you would lose by cashing in your retirement, and that doesn't even include any gains you might have on the money over the next X number of years before retirement. Do you really think it's a wise financial move to pay 40% interest on a loan? Nobody in their right minds would take out a loan with those terms... yet if you use your retirement money, it would be the same as taking out a loan with 40% interest (about what you'll pay in taxes and penalties).

Don't do it.

ETA: We have some investments overseas. When we have cashed them out, we've had to pay double taxes... in the country of origin and in the US when we brought the money over. That 40% might be a VERY conservative figure once you've paid US taxes and Canadian taxes... not to mention that the tax returns get very complicated. We usually pay between $800 - $1000 to get our taxes done when we've had to deal with taxes in multiple countries, so there's also that extra expense.

velochic, I am worried about the taxes. Thank you for the heads up about that. I am confused about the penalties though. In reading through the annuity paperwork, it seems that if we cash out early we will pay a 10% early withdrawal penalty and also income tax. However we will have to pay income tax on the money when we withdrawal the money no matter when that is so I don't know if I should consider that as a downside to early cashing in.

Your advice to appreciate their help is also good advice. My ILs are very generous caring people and I am so lucky to have them. This is a difficult situation to be in and I am trying hard to keep that at the forefront of my mind. It is all sort of complicated because they do not communicate with one and other about money and now I feel like I am in the middle of their not so healthy money issues. If I wasn't so in debt to them, I would never think twice about their money issues with eachother. It's just that now I feel smack dab in the middle of that. I really do not want money issues to taint our othewise great relationship.

[velochic]

Originally Posted by shelleyd

However we will have to pay income tax on the money when we withdrawal the money no matter when that is so I don't know if I should consider that as a downside to early cashing in.

Yes, you will pay taxes. However, if you use it for its purpose (retirement), you will be paying regular income taxes, as usual, for living expenses in your older years (and you will probably be in a lower tax bracket then, anyway).

What you are proposing is to cash it in to pay off interest-free debt. Do you see the difference? You already have income coming in, that you are paying taxes on... then you're going to add to that income to pay off debt that doesn't need to be paid off and is costing you nothing. On top of that, you're paying a penalty. It's just not a good idea any way you cut it (financially). HTH!

[leavemealone]

I would almost certainly NOT cash in any retirement for the purpose mentioned in the OP. Velochic is doing a good job explaining why it's not a good idea. About the only time I would cash in retirement is for a child with medical bills or to keep a family member out of jail (and even some of them I wouldn't do it for)