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Retirement savings vs. credit card debt

Chris Farrell Mar 4, 2011

Question: My husband and I received a little money over the holidays, specifically $1000, and we are trying to determine what the best thing to do with it is. We live check to check with no savings. My husband has a retirement account through his work, but I, who am self employed, do not have any retirement. We are 37 and 38 year old with 2 children, ages 3 and 5. We also have some credit card debt (~$4700) as well as debt on a car and a home improvement loan. Our debate is whether we should pay down part of the credit card debt, or use it to start a retirement account for me. What is your advice? Thanks for your help! Teresa, Seattle, WA

Answer: My normal reaction when there’s extra money is to use it to pay down credit card debt. However, I’m concerned you that you don’t have your own retirement savings plan.

The financial relief opened up by the $1,000 lets you set up a retirement account in your name. A Roth-IRA might be the best choice since your family is living paycheck to paycheck. The contributions into a Roth are after-tax dollars. You can count the money as emergency savings since you can withdraw contributions tax-free and penalty-free in a pinch. Just leave the earnings alone.

A Roith is both a retirement savings account and an emergency savings fund.

You say you’re self-employed, so maybe a SEP-IRA? It’s a simple, low-cost retirement savings plan for the self-employed. A SEP is funded with pre-tax dollars.

Of course, there is nothing wrong with using the money to pay down credit card debt if that’s what you end up deciding to do. It would help you eliminate the debt faster if the approximately $4,700 credit card balance becomes $3,700.

It’s a good debate you and your husband are having. I lean toward taking the opportunity to start a retirement savings plan in your name, probably with a Roth. Either way, you’re better off than before.

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