Should You Use Retirement Funds to Pay off Debt?

Orange piggy bank with man putting coin inside

Using retirement funds to pay off your debt can sometimes be the most financially sound course of action, and sometimes it can lead to more problems down the road. When using money that you withdraw early from a 410(k), IRA or other retirement assets to pay down any debt you may have incurred, you need to know what your financial situation is and what strategy is right for you.

Using your retirement savings to pay down debt can be done in one of two ways: you can take a distribution or a loan. A distribution involves taking money out of a retirement savings plan permanently, resulting in the possible loss for those funds to grow over time. If you decide to take out a loan from your retirement savings account, you eventually have to pay the money back. This can be more profitable since the purpose of a retirement savings account is to allow your money to appreciate over time. Be aware that if you are already retired, you cannot borrow money from an employer-sponsored retirement account (such as a 401(k), 403(b) or 457 plan). This is a strategy that can only be used by someone who is still gainfully employed and whose retirement plan permits borrowing.

Is Using Retirement Funds to Pay off Debt is Right For You?

In order to figure out if using retirement funds to pay off debt is right for you, it is important to take stock of what the interest is on each of your forms of debt. If you are under the age of 59.5 when you withdraw funds from your retirement account, you will incur a 10% penalty on the withdrawal plus have to pay ordinary income taxes on any amount you withdraw. If your credit card interest rates are higher than 10%, this might be a favorable strategy as taxes have to be paid on this money eventually.

Additionally, if you are only able to make minimum payments on your debt, the interest you accrue can be sizeable, making paying down your debt with your retirement savings a smart strategy.

Evaluating Your Plan

Part of evaluating whether or not this is a good financial strategy for you is to figure out how it fits into your larger financial plan for retirement, an assessment our certified credit counselors are happy to discuss with you. Withdrawing money from a retirement savings account to pay off credit card debt can save you money in the long run, as long as it is a part of a financial approach to remain debt-free. If, however, you withdraw the funds permanently to get out of credit card debt and then return to accruing substantial debt, this is not the right option for you.

If you’re currently struggling to make minimum debt payments or have fallen behind, you are not alone. CreditGUARD is here for you with certified credit counselors who can help you make the best of your current financial situation and move toward a brighter financial tomorrow. Call us today at 800-500-6489.


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