It is never advisable to use your retirement savings for anything other than its intended purpose, unless you have to. It is never a good idea to risk not being able to take care of yourself in retirement to save your credit score and pay off debts. The good news is that you may not have to, as there are alternative ways to get your hands on some cash without touching your retirement funds prematurely.

Why It Is Not a Good Idea to Pull Funds from Your Retirement Savings to Pay Off Debts

Generally speaking, it is not a smart move to use your retirement account to pay off debts, even if we are talking about high-interest credit cards or payday loans. As soon as you withdraw from your retirement account, you stop your growing portfolio and prevent the compounding interest from doing its magic. As a result, you might find yourself with a shortfall after retirement.

Tapping into some retirement accounts too soon can result in a hefty tax bill and, often, a penalty, making things even more difficult if you don’t have the cash flow to pay off the debt. The money in your retirement accounts is meant to be used when you retire, so early withdrawals come with a penalty. A sizable portion of your withdrawal will be directed to the IRS between taxes and penalties.

When withdrawing from retirement funds, you voluntarily give up the money you would have earned through compound interest. Compound interest is your best friend, but only when you allow it to work for you. It is free money for those who wait. It’s money for the future, not for today.

You’re in it for the long haul and investing requires patience and self-control. The long-term costs of stealing from your retirement account are never worth it. You may think you can compensate for the loss by contributing more money to your IRA later, but remember, annual contribution limits exist.

Alternate Ways to Pay Off Debts

Understandably, you want to keep your credit score high or avoid collection calls. Living with debt can be stressful, but there are numerous ways to deal with it.

#1: Create a Budget

Having a budget will give you back control over your money. Make a list of all your expenses and see how much you spend on “needs” and “wants.” With the help of the budget, you can cut off a few luxuries, downsize your expenses and put your excess income towards your debt payments.

As soon as you start paying more than just the minimum payments each month, you will begin chipping away at the principal amount of your loans. This way, you will pay off your debts quicker and cheaper as you will also pay less interest over time.

#2: Consolidate Your Debts

Using the debt consolidation method, you can combine multiple debts into a single monthly payment that will be lower than the total debt payments you are currently making. With debt consolidation, you only have to make one payment at a lower interest rate, making it easier to pay your bills. If done right, you can get rid of debt cheaper and faster.

You can consolidate anything from your credit cards, unsecured loans, payday loans, and medical debts. If you decide debt consolidation is the right step, looking around for the best debt consolidation companies near you is crucial. As long as you stick to the plan, there aren’t many cons to consolidating your debts.

#3: Try the Debt Avalanche or Snowball Method

The avalanche method involves paying off the debt with the highest interest rate and working down to the lowest interest rate. This method makes the minimum payment on all debts and puts surplus money towards the highest interest rate debt. Once having paid off the highest-interest debt, you can focus on the next highest one.

The debt snowball method will have you make the minimum payments on all your debts and put any surplus towards the debt with the smallest balance. After it’s paid off, you move on to the debt with the next smallest balance.

This strategy will be the best for you if you struggle to stay motivated to pay off debt because you will be seeing progress in a short time as you pay off the smallest debts. The only downside to this method is that you will be accruing more interest than you would with the avalanche method.

#4: Look into Credit Card Balance Transfer

You should consider credit card balance transfers if you have a lot of debt on high-interest credit cards. You can move debt from one account to another with a balance transfer, and you can save a lot by moving high-interest debt to a credit card with 0% APR.

Balance transfers work by first applying for a new card with a low introductory APR and then initiating a balance transfer. After the balance has been transferred to the new card, you can start paying it off.

You will save considerable money if you manage to pay it off during the introductory 0% APR period. Credit cards are also not the only type of debt you can transfer; many companies allow you to transfer other types of debt, including car loans, personal loans, etc.

The Bottom Line

While it may be tempting, withdrawing funds from an IRA to pay off debt is wrong, and that money is not only subject to insanely high early withdrawal penalties and taxes but is, in essence, stealing from your future self.

There are plenty of alternate ways to pay off your debts, including, but not limited to, debt consolidation, avalanche and snowball payment strategies, credit card refinance, and downsizing your expenses to focus more on debt payments.

But of course, each person’s situation is unique. Riding your account may be worthwhile if you have a surplus in your retirement account or can make up the difference in a short period. Before deciding on a strategy for your long-term financial goals, always consult with a financial advisor.

Let’s Have a Conversation:

Financial experts always advise avoiding tapping into your retirement funds to pay off debt. Did you ever take money out of your retirement account to pay off debt? How did it affect your savings? Did you manage to compensate for it later down the road? Please share your experience of borrowing from your retirement account if you ever did so.