Should I Use Roth Ira To Pay Off Credit Card Debt

If y'all're sitting on a pile of debt that yous're struggling to pay downwards, you lot're probably because all of your financial options — including withdrawing money from your IRA to pay down your debt.

At this indicate, retirement seems similar light-years away, especially if you lot've been contributing money to a retirement fund while simultaneously sitting on debt.

While this money sits in a retirement fund and your debt continues to grow, you might want to jump on withdrawing money from your retirement fund to help pay information technology down.

But does it make sense to make an early withdrawal from an IRA to pay off your debt?

The short answer: we exercise not advise this.

Acquire why information technology is not the all-time idea to dip into this retirement account for the purpose of reducing credit card debt.

Withdrawing Early on From Your IRA Will Toll You

The regime does not want you to withdraw money from your retirement accounts until you reach age 59 ½.

This is to protect you from doing exactly what you are planning to do right now: withdrawing money early on and not having enough money left over for your retirement.

Because of this, the IRS charges penalties for almost types of early withdrawals.

Any coin you withdraw from your retirement accounts is considered income, which means you lot besides accept to think nearly the taxation implications.

Let's look at the taxes and penalties associated with early withdrawals from Roth IRAs, traditional IRAs, and 401(g) plans.

Roth IRA early on withdrawal penalty

Since Roth IRAs are funded with post-tax income, they have slightly different early on withdrawal rules than traditional IRAs and 401(k)s.

Roth IRA funds are divided into two types:

Contributions: the money yous contribute to your account
Earnings: the money your contributions earn through interest and market place growth

Contributions can be withdrawn at whatsoever time without paying additional taxes or penalties.

When you withdraw earnings, you have to pay tax on your withdrawal along with a ten% penalty unless the earnings are considered a "qualified distribution," in which case y'all only have to pay taxes.

Since paying off debt is not a qualified distribution, assume you'll have to pay both revenue enhancement and the penalization.

Here'south an example of how this might work.

Let'south say you've contributed $15,000 to your Roth IRA, and the total value of your Roth IRA is $25,000, pregnant you lot accept $15,000 in contributions and $10,000 in earnings.

Yous could withdraw $15,000 from your Roth IRA without paying taxes or penalties.

If you withdraw $20,000, you'll have to pay tax and a $500 penalty on the $5,000 in earnings yous withdrew.

What does that mean? At the 22% revenue enhancement bracket, withdrawing $5,000 in earnings will price you lot $1,100. Add the $500 penalty, and that's $1,600 of your withdrawal gone forever.

Traditional IRA & 401(m) early on withdrawal penalization

Traditional IRAs and 401(chiliad)southward are funded with pre-tax income, which means you volition pay tax on every withdrawal or distribution yous receive from those accounts.

If y'all cull to make an early withdrawal, you'll pay both taxes and a 10% penalty.

Equally with the Roth IRA, certain types of early withdrawals are exempt from the penalty, just paying off credit bill of fare debt isn't one of them!

Following the Roth IRA example above: if you contributed $15,000 to your traditional IRA and the total value of the IRA is at present $25,000, yous'd pay tax and a 10% penalty on every dollar you withdrew from the account.

Desire to withdraw $20,000? Y'all'll exist stuck with both the revenue enhancement and a $2,000 penalty.

At the 22% tax bracket, you'll pay a whopping $4,400 in taxes on your $20,000 withdrawal, plus the $2,000 punishment. That ways you lot're paying $6,400 just to take your money out of your retirement accounts!

Other Disadvantages to Withdrawing Early

Although withdrawing money from your retirement accounts might sound like the all-time solution to your debt trouble, you accept to consider all of the potential disadvantages:

Taxes and penalties

You're paying what could be several thousand dollars in taxes and penalties just to pay off your debt. That's like throwing adept money after bad.

Withdrawals considered every bit income

Whatever money you lot pull from your retirement accounts is taxed as income — and if that income pushes you into a higher tax bracket, you'll pay even more taxes on the amount you but withdrew.

Lose the potential growth of retirement savings

We'll wait at exactly how much money you might lose in the side by side section.

Potentially, a bad fiscal habit

Withdrawing from your retirement fund now might make it easier for y'all to exercise it again in the future — and if you lot withdraw as well much, you won't have enough left in your accounts to fund your retirement.

From a Numbers Standpoint, Information technology Doesn't Make Sense

When you run the numbers, you're taking a loss by withdrawing early.

You not only take to pay penalties and taxes, but you also lose all the money that income could take earned had you lot left it in your IRA.

Retirement funds are all about compounding, and you desire each of your retirement contributions to be able to grow for every bit long as possible.

The $v,000 you lot withdraw from your IRA in your 20s could have grown to virtually $60,000 by retirement age, assuming a 6% charge per unit of return.

Withal, some people would prefer the emotional/psychological relief of paying off a big debt, even if it means having a smaller retirement fund. Having debt tin can be stressful and can prevent yous from pursuing other opportunities.

Large amounts of debt can touch on your credit score and could prevent you from achieving big life goals such as buying a abode.

Only you lot tin make up one's mind whether the numbers are more of import than the emotions, but we recommend examining other debt repayment options earlier making an early on withdrawal from an IRA.

Other Options to Consider

Consolidate credit carte debt onto a 0% intro-APR credit card

Many balance transfer credit cards are designed to help people pay down their credit bill of fare balances speedily, and these cards often give yous a total year earlier they offset charging interest.

You will accept to pay a rest transfer fee, just information technology'll be worth information technology to get those debts paid off.

Accept out a personal loan

Personal loans often have lower interest rates than credit cards, especially if you lot have a high credit score.

Use your personal loan to pay off your loftier-involvement credit carte debt, then pay off the lower-involvement personal loan.

Borrow confronting your 401(one thousand)

You don't have to withdraw money from your retirement accounts to pay off your debts. If you accept a 401(chiliad), you can borrow money from yourself at a low interest rate.

Be enlightened that you have to pay your loan back or face the types of financial consequences outlined to a higher place.

This choice is as well not brash as it also takes away from the growth potential of your retirement portfolio.

Talk to your credit card company

If you'd similar to reduce the interest yous're paying on your debt, it'south worth calling your credit card company and asking them to lower your Apr.

This tactic is nearly likely to work if yous have a history of on-time payments and/or if you can prove that your credit habits take improved since you opened the bill of fare (maybe you have a higher credit score, for example).

Accommodate your upkeep

Go through your monthly expenses and decide what tin can be reduced or cut — and and so put that money towards your debt.

File for bankruptcy

This should only be used as an accented last resort, but if you are truly overwhelmed by debt, bankruptcy is an option.

Decision

While you accept to weigh what makes the most sense for your personal situation, we don't advise dipping into your retirement fund.

Take a wait at all of your options and see if at that place's a better solution that won't cost as much money — both now, and in the future.

Consider refinancing your high-interest credit card debt with personal loans: