The Bills

I’m in Debt Because I Got Sick. Is It OK to Raid My Retirement Fund?

Your personal finance questions, answered.

hospital patient.
You don’t have to raid your retirement account to pay medical debt.

Zsolt Nyulaszi/Thinkstock

Welcome to Ask the Bills, where every two weeks Helaine Olen answers readers’ questions about their most nagging personal finance and financial etiquette dilemmas. Seeking advice on a money issue? Email helaine.olen@slate.com.

Helaine,
I just turned 50 and have $50,000 in my own debt and $75,000 in student loans for my daughter (from a bank, not the federal government) that I will have to start paying in mid-2018. The numbers are crazy, and I’m starting to feel like I can’t get out from this burden. The main reason for the high debt was that I was diagnosed with leukemia in 2010, and in 2014 my only option was a bone marrow transplant. I have been very fortunate to have a match and two years later am ecstatic to wake up every morning and live my life. I was out on disability for 10 months and then lost my job in a company downsizing. It took about six months to find another (because going out on interviews with a hat and wig doesn’t go very well!). I initially took a job that paid about half of my previous salary and switched jobs a few months later to one that pays about a third less. While my husband’s insurance was excellent, the layoff cost about $100,000 in lost income, which was partly made up by turning to credit cards to get by. I have an individual retirement account with a balance of $246,000. My question: Should I take a withdrawal from the IRA of about $45,000 to pay off most of the credit card debt? If I don’t do it, it will take me between 10 and 15 years to pay off the credit card debt. If not, what would you recommend?

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I’m so glad you’re now healthy. A health care crisis is one of the leading causes of bankruptcy in the United States for many reasons. It’s not just the actual medical bills that are so catastrophic to finances; the subsequent loss of income is also devastating. Many people don’t have disability insurance, and even when they do, it doesn’t come close to replacing their full incomes. No surprise: The bills pile up, and people like you have to turn to credit to get by.

So what do you do? As Saundra Davis, a financial coach and executive director of Sage Financial Solutions, notes, several years out you are still earning significantly less money than before your illness. Instead of immediately taking money out of a retirement account, it makes much more sense to contact both a bankruptcy attorney and a debt counselor to get a better sense of your options. The student loans are almost certainly ineligible for relief, but your credit card debt may well be. On the other hand, your IRA is protected in bankruptcy up to just under $1.3 million. But if you take the money out, it’s gone—and your chances of making it up, given your reduced earnings, aren’t great. Davis suggested contacting Balance, the new name of the Consumer Credit Counseling Service of San Francisco, to discuss options including a debt management plan; and, yes, you can use it even if you’re not based in California. The Consumer Financial Protection Bureau also offers access to financial coaching services—or at least it will as long as the agency exists. (That’s a joke. Sort of.)

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A final note: There’s a myth that people casually resort to bankruptcy. Nothing can be further from the truth. Most personal finance experts believe people do what you want to do—take money from a retirement account—in the hopes of avoiding bankruptcy. You don’t need to do that. There’s no shame in getting cancer, there’s no shame in losing your job, and there’s no shame in resorting to legal protections so you don’t further destroy your financial life as a result of it.

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Helaine,
My 10-year-old has
neurofibromatosis type 1, with a mild heart murmur and some developmental delays. My own experience with cancer means I can’t get any kind of affordable life insurance, and I’m wondering if my son would bump up against that as well. I know life insurance for children isn’t generally advised, but should I get him a policy now in case he can’t get one when he’s older due to health issues?

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For the vast majority of people, obtaining life insurance for their children is a giant waste of money. Life insurance protects a family’s finances in the event a breadwinner dies. Unless they are child actors, children don’t earn significant sums. So why does children’s life insurance continue to exist? In many cases, it’s marketed as a savings instrument. It’s not a good one. I priced out one policy that Gerber offers earlier this year. Parents would be better off sticking their money in a mattress; after 15 years, the cash value of the bedding would be greater than that of the policy.

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But your situation is slightly different. When I spoke with Glenn Daily, the rare insurance adviser who works on a fee-only basis (that means he doesn’t take commissions from insurance companies for steering clients toward their offerings), he said it’s all but impossible to know how insurable your son will be in the future. We can only evaluate the situation now. He suggested you reach out to a few insurance companies and start a process called an informal inquiry, which is insurance speak for saying you’re interested in more information. The insurance company, in turn, will ask you a few questions about your child and his health situation and advise you from there.

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Do you actually need to get your son insurance? I can’t answer that. But I can suggest you think about why you’re so worried about the issue. It’s possible you’re proactively thinking about a legitimate financial issue your son’s future family may face one day. But more likely you’re worried about your son’s future. Neurofibromatosis is, as of now, an incurable illness. In many cases, it’s nothing more than a minor inconvenience, but for a minority it can turn into something more serious. It’s only human to want to secure your son’s future in any way you can. But life insurance can’t answer the question I suspect you are really asking.

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Helaine,
I’m 24 years old, and ever since graduating from college two years ago I’ve been putting a good chunk of money aside each month toward my emergency fund. I now have $12,000. So now what? I’m already contributing 6 percent to my 401(k) and receiving the full match from my employer. I carry no credit card or student loan debt. I may want to go back to school in a few years, or I may want to buy a home. I’m not sure yet, but I want my money to be accessible in case I do either of these things. I was thinking of opening a Roth IRA since I know they’re pretty flexible. Is that the right move?

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Whenever I get letters like this, I’m embarrassed for my 24-year-old self, who would have never, ever acted this responsibly with money. I would certainly recommend a Roth IRA, which will permit you to withdraw the original principle without penalty before the age of 59½, as well as use investment gains for college expenses or the purchase of a home (the latter is limited to $10,000). There are, I should add, rules about withdrawing earnings (as opposed to contributions) for accounts less than 5 years old—the best and simplest write-up I’ve seen on this is on the Charles Schwab website. The bigger question is what to do with that money once it’s in the Roth IRA. If you believe you’ll need to access it in less than five years, few would recommend the stock market in any major way. If you don’t want to simply leave the funds in a money market account, I would suggest investigating target-date funds. Those are life-cycle mutual funds that are geared toward investors retiring in a particular year. But I wouldn’t pick your projected retirement date. Instead, I would suggest choosing one with a retirement date within the next couple of years—like, say, 2020. This will give you a conservative mix of investments but still some stock market exposure. But a warning: I am forever reminding people that some target-date funds suffered steep losses in the 2008–09 stock market rout. If don’t believe you should take any risk with the money, it’s probably not right for you. And one other thing: Your habits are fantastic. I don’t want to discourage you from saving money, but I would also urge you to make sure you aren’t sacrificing too much in the way of fun to do so. You’re 24 years old! It’s fine to enjoy restaurants and travel. I’ve no doubt you can do that and still put an adequate sum of money away.

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