Congratulations. Any part of the withdrawal that comes from investment earnings is subject to taxes if you take it out before the age of 59½. But you’re not alone. It’s not money for today; it’s money for tomorrow. A withdrawal penalty is a penalty or extra charge incurred by an individual from an account where withdrawals are controlled according to a timeline. If you had $10,000 in debt to pay off you would need to come up with an additional $1,400 to pay it off. Definitely, do not use your IRA funds to pay off your mortgage. We’ve got everything you need to know about how to pay off debt. Depending on the type of account you have, the rules may vary when it comes to withdrawals. Here are some tried and true methods for knocking out debt that your future self won’t regret. Then use that budget we mentioned to cut back on your spending and throw even more money at your debt. 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. 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. Start by listing all outstanding credit card debt, in order of annual percentage rate (APR), from highest to lowest. We also reference original research from other reputable publishers where appropriate. Just us? The danger of raiding your retirement savings. But if you want to take out any earnings (aka any growth from compound interest), you have to be at least 59 ½ and the Roth IRA itself has to be at least five years old. 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. More specifically, using your retirement to pay down debt. Make sure you use the funds to pay off your debt, and use wise financial decisions so you don't end up overwhelmed by debt again. Why? Do all you can to minimize the cost to you and your finances, so that when it’s all over you can start afresh on the important tasks of living within your means and re-building your retirement nest egg. 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 also have to pay taxes on whatever you take out, but the IRS usually withholds 20% automatically. A number of apps and online spreadsheets promote a variety of debt reduction strategies such as paying the cards with the highest interest rates first, or the debt snowball method. Howard Dvorkin, CPA and Debt.com chairman responds… Without studying your Roth IRA in detail, I can’t advise you for certain – but you probably shouldn’t raid your IRA to pay off your student … Here’s everything you need to know about Roth IRAs. Dave Ramsey says you shouldn’t take money out of your IRA early unless it’s to avoid bankruptcy or foreclosure. It’s like Chris Hogan says: “Compound interest is your best friend, but only when you give it the opportunity to work.” That’s what we call free money to those who wait. When you withdraw funds early from an IRA, you will likely face taxes and/or penalties, which can add substantially to the cost of taking out that money. The money is used to pay an IRS levy (a legal taking of property to pay back a tax debt). 9 Minute Read Looking for an alternative way to pay off credit card debt? Decide how much of the total debt you want to pay off. A premature distribution is one taken from an IRA, qualified plan, or tax-deferred annuity that is paid to a beneficiary that is under age 59½. Whether you pronounce it eye-ruh or you sound out each letter, an IRA (Individual Retirement Account) is a great tool to build wealth and make sure you retire with dignity. It can be very tempting for debtors to tap into their IRA to pay off debt, but it comes at a hefty price. But if you’re starting to consider your retirement fund as a way to dig yourself out of the hole, hold up! This is to protect you from doing exactly what you are planning to do right now: withdrawing money early and not having enough money left over for your retirement. That's because if you're under 59 ½ years of age, you could face a 10 … You’re in the military and are called to active duty. A Ramsey Solutions Master Financial Coach can encourage you and help you make the best decision for your financial situation. You should also consider making cuts wherever possible. The idea is that you gain momentum along the way, much like a snowball rolling down a hill, and eventually pay off the largest 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. A counselor also may help with lowering payments on your credit card debt. That way you won’t lose any of your savings. Debt. Debt Avalanche vs. Debt Snowball: What's the Difference? Using Your IRA to Pay off Credit Card Debt The Downside. 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. If you remove part of your retirement savings, it will not only provide you with less retirement savings, but you will also have less money compounding for you over time," says Kirk Chisholm, wealth manager at Innovative Advisory Group in Lexington, Mass. When that snowball starts rolling, it’ll give you the momentum you need to get out of debt for good! Now, Be a Part of If it’s not, you’ll be forced to pay—you guessed it—a 10% penalty, plus taxes. A Roth IRA is a retirement savings account that allows you to withdraw your money tax-free. With a traditional IRA, since you did not pay taxes on the money before you put it in, you have to pay income taxes when you take it out. Some people use this as a way to retire early. These early withdrawals are also subject to the 10% penalty. You’re in it for the long haul, and investing takes a decent amount of patience and self-control. 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 reader name Sam recently wrote in to ask about using Roth IRA funds to pay off debt.Here’s his question: I have around $19, 500 in a Vanguard Roth IRA. We think you should take full advantage of a Roth IRA—and the best way to do that is to leave it alone until you retire. See? The debt snowball method is the fastest way to pay off debt because it gives you money wins that motivate you along the way. Why Adam Might Want to Invest While Paying Off Debt… If Adam sticks with his plan to put his entire surplus toward paying off his debt rather than investing, he’ll make 24 payments of about $2,226 and pay just over $3,400 in interest. We have about $40k in debt … Don’t rob your future self just because it’s easy right now. And that’s if you don’t contribute anything on top of that. Coaching, Listen or Watch And if you take out a significant amount, it could bump you into a higher tax bracket. But it is rarely a good idea to tap money earmarked for your retirement. After all, it's meant to be tucked away until you retire, and isn't a cash machine. How to Pay Off Debt and Save for Retirement When you ask for advice on whether you should pay off debt or save for retirement first, you’ll quickly encounter the crowd that thinks all debt is … The purpose of retirement funds is to make sure you’re taken care of once the income stops rolling in. First, you should understand the rules. 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