It’s not money for today; it’s money for tomorrow. Don't do it. After all this, you've decided to make that withdrawal, you've prepared yourself for the implications, and you pay off your debt. 5 Minute Read When that snowball starts rolling, it’ll give you the momentum you need to get out of debt for good! Other methods for paying off debt include: It’s important to examine other options to make sure the path you are on is the right one for you. If your bare-bones expenses still outstrip your income, you might consider taking IRA withdrawals to bridge the … We’ve broken down what happens when you cash out a retirement fund early, and we’ll tell you how you can pay off debt without raiding your IRA. Okay, so … And a budgeting tool like EveryDollar forces you to be more intentional with the money you have now, instead of wondering where it went later. A Roth IRA allows you to withdraw funds tax-free, assuming the money has been there at least five years, because that contribution was made with after-tax dollars. First of all, it’s important to acknowledge up front that this may not be a wise financial move for... Making the Withdrawal. Since a Roth IRA uses after-tax dollars but grows tax-free (one of the reasons why we love it so much), you’re able to pull out any of your contributions, regardless of your age and without penalties or taxes. If you don't, you may end up in the same position, and you can't rely on your IRA every time. Regardless of what strategy you use, they involve applying the same amount of money to reduce debt each month—even after one account is paid off. Should I take money from my IRA to pay off debt Taking withdrawals from an IRA before you're retired is something you should do only as a last resort. If you have money in an individual retirement account (IRA), you can withdraw funds to pay off credit card debt and potentially save yourself thousands of dollars in interest. In most cases, it's a bad idea to drain your 401 (k), IRA or other retirement assets to eliminate credit card obligations. Money taken out of an IRA early (before the age of 59 ½) must be transferred to another retirement account within 60 days to be considered a “nontaxable rollover.” We repeat: 60 days! And the penalties and taxes you have to pay on that money depend on the type of retirement account it came from: 401(k), traditional IRA or Roth IRA. Learn why a Roth IRA may be a better choice than a traditional IRA for some retirement savers. Some people use this as a way to retire early. You use the funds for a first-time home purchase (up to $10,000) You become disabled or you pass away; The only way, then, that you can use funds from your IRA to pay off debt, according to the above information, is to use your distribution to help pay … And because 401(k)s are funded with before-tax dollars, you’ll still have to pay taxes on anything you take out, even after the age of 59 ½. And while you can't squeeze anything more out of the paycheck, you may have a tidy sum sitting in your individual retirement account (IRA). No repayments. But suppose Adam opts to use part of his surplus to max out his Roth IRA … Here’s everything you need to know about Roth IRAs. You may be tempted to just pull the money out of your 401(k) or IRA to pay back your creditors and kiss your debt goodbye for good. | You Should Pay off These Types of Debts First, When Paying off Debt With Your 401(k) Makes Sense, Using Your IRA to Pay Off Credit Card Debt. If it’s not, you’ll be forced to pay—you guessed it—a 10% penalty, plus taxes. Investopedia requires writers to use primary sources to support their work. But you’re not alone. We’re glad you asked! Because using your retirement fund for anything other than retirement can come at a big cost. Tax Pro vs. The 401(k) is divided in a divorce under what’s known as a Qualified Domestic Relations Order. The purpose of retirement funds is to make sure you’re taken care of once the income stops rolling in. Unlike other options like a debt consolidation loan, you don’t have to make any repayments with … And if you take out a significant amount, it could bump you into a higher tax bracket. You’re in the military and are called to active duty. How Financial Advisors Can Help With Debt, The 7 Best Debt Reduction Software Programs of 2020, Retirement Topics - Exceptions to Tax on Early Distributions. You feel like you're drowning in credit card debt. But even as it becomes easier to access your 401(k), remember that you’re the one who has to live off that money when you retire. Unfortunately, this is almost always a really bad idea. Kick off your money reset with our FREE livestream! You already paid taxes on the money you’re putting in there, so why would you want to pay more by taking money out too soon? Like a 401(k), there are some exceptions to the early withdrawal penalty for traditional IRAs (We’ll dive into those in a minute.). Don’t make the mistake of assuming you can invest the IRA in stocks and earn a lot more than 1%. This basically means you have to continually take out a certain amount from your retirement fund over time—and that’s determined by your account balance and life expectancy. Enables you to grow your retirement to pay off debt, so … a:,. Years, paying off the credit cards you earmarked in order of highest APR wife has $ 40k debt. 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