Today TaxMama hears from Christine in the TaxQuips Forum, who is unhappy with her investment. “I have an IRA, with 2 classes of shares of the same mutual fund.  One is doing OK; the other is leaking money like a sieve.  I’d like to use the poor one (about $2,800) to pay down or off some cards with a 15% interest rate.  Would the early withdrawal penalty negate this advantage?  An even bigger question is that I’ve used up to 50% of my contribution as a tax credit.  Would I have to give that back?”

Hi Christine,

Here’s what’s going to happen when you draw out that $2,800 – if you are younger than age 59 1/2.

1) You will pay the early withdrawal penalty – for IRS and state.

2) You will pay income tax, in your current tax bracket.

That amount probably won’t shoot you up to a higher bracket.

So, figure that for federal and state, it will cost you about 30% of the $2,800 –  or about $800 +/-. Not the end of the world – but you would only get about $2,000 towards your credit card bills. 

The other alternative is to get out the terrible fund and invest the $2,800 into a fund that’s doing well.  That’s worth exploring too.

 And get yourself a new credit card with a much lower interest rate – 0% perhaps?

As to the tax credits you’ve received? Very good question! No, you don’t have to pay those back.

And remember, you can find answers to all kinds of questions about IRA withdrawals and other tax issues, free. Where? Where else? At www.TaxMama.com.

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