Should you use your retirement to payoff debt?

This question, “Should you use your retirement to payoff debt?” has recently come up a few times, so I decided to address it. The answer is, “No.” “Why?” you might ask. It is really simple. If you withdraw money from a retirement account, the IRS will automatically take 10% off the top as an early withdrawal penalty; and then, you will be charged taxes on the total amount you took out, unless you repay it in that same year.

If your credit card debt or other debt is say $20,000 and you withdraw the $20K from you retirement account, you will only receive $18K. This means that you won’t have enough to payoff the debt. You would need to withdraw $22K to payoff $20K. Then, the IRS would take $2K and tax you on the full $22K.

So, you see this is not a great idea.  Leave your money in your retirement account. Instead, use the snowball method to payoff your credit card debt. Sell some of the stuff you don’t use to apply towards the debt. Get a part-time job to increase your income, so you can apply it to the debt. But under no circumstances are you to touch that retirement account!


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