Should I Use My Retirement Account to Pay Off Debt?

Particularly after the holidays, households are seeing their credit card debt increase. It may be tempting to turn to other sources of savings to pay down these balances. However, using retirement funds presents a few key complications that can make it a bad financial decision long term.

First, you may pay considerable taxes on any withdrawals. For example, a 401(k) is meant to be left untouched until age 59½ . Try to withdraw funds prior, and you’ll pay income taxes in addition to a 10% penalty. Fees and taxes exist with Individual Retirement Accounts (IRAs) and Roth IRA accounts as well.

As a general rule, you should leave your retirement funds alone unless you have no other way to pay for essentials like food or housing. Instead of tapping into your savings in advance and losing out on tax breaks and interest accrual that could benefit you later in life, consider these tactics:

  • Debt consolidation – This refinancing option could help you by combining all of your debt into a single loan that can be negotiated into a collective, possibly lower, interest rate.
  • Balance transfers – By moving debt from one account to another, you may be able to pay off the balance with a lower interest rate.
  • Budget cuts – Evaluating your regular spending can often reveal areas where you can cut back, diminishing the ongoing amount of spending and debt that you’re taking on.

Ultimately, if you are concerned about your finances, know that our team is here to help with your unique situation. Feel free to reach out to us at 716-445-7465 or email [email protected].