It is conventional wisdom to pay off your debts when ever possible, unsecured debt can incur high fees and interest, and freeing your self from your monthly bills can be a huge relief. If you have been saving for retirement, you may be wondering if it is a good idea to use an IRA to pay off debts.
Before you take steps to withdrawal and funds from your IRA, there are some important considerations. Early withdrawals from IRAs carry steep penalties and fees, and depending on your circumstances, these may far outweigh any potential benefits.
Use An IRA To Pay Off Debts: Costs
It is important to consider the cost associated with cashing out an IRA, as this can be a very costly option. Withdrawals from your individual retirement account are subject to an IRS penalty of 10%. You will also have to pay your ordinary income tax on funds withdrawn from a traditional IRA.
If you are withdrawing from a Roth IRA you will not be subject to income taxes, but you will be charged a 10% penalty on any earnings on investments withdrawn. In either case, this means that a large portion of your money earmarked for retirement will not be able to go toward paying off your debts.
Use An IRA To Pay Off Debts: Your Opportunities For The Future
It is important to think about the future, and when you use an IRA to pay off debts you are using money that may have taken years to accumulate, and it may take a considerable amount of time to build your account back up.
Funds withdrawn from your retirement account will also not have the opportunity to earn returns, and this could possibly cause you to lose thousands of dollars in retirement money that could have been yours.
While paying down debt is important, it can be a short-sighted strategy to liquidate your IRA to pay your unsecured debts. Exploring other debt-relief options first can help you pay off your high interest debt and continue to save for retirement.
Controlling Your Spending
A large amount of credit card debt normally indicates that you are spending more than you take in or can afford. By simply withdrawing money from your IRA to pay down these bills, you are not addressing the root of the problem.
By not addressing this problem directly, you run the risk of racking up even more debt after the original bills have been paid off. If you have liquidated your IRA to pay off the original debt, then you will be even worse off than before.
Benefits To Paying Off Debt
The major benefit when you use an IRA to pay off debts is the money you save in interest charges which can add up to thousands – even tens of thousands depending on your debt load and APR – and you can also free up money every month.
Every situation is unique, and your individual circumstances should be considered before withdrawing any funds from your individual retirement account. It is advised that you consult with a financial adviser, such as the retirement and investment specialists at ETrade, or a trusted professional money manager, to better understand your debt options.
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