Reader Questions

Paying off credit card debt with IRA.

Written by Consumer

I am married with two kids, 12 and 16 years old.

We have $80,000.00 in credit card debt (7 credit cards), $70,000.00 in line of credit debt, and a mortgage on which we owe $445,000.000.

We have approximately $250,000.00 in our IRAs. We are paying about $1,500.00/month for minimum payments on the credit cards.

As you can see we are paying out $18,0000.00 per year in credit card payments. If we use the IRA to pay off credit cards I believe the penalty and taxes would be about $35,000.000. I think the $80,000.00 would bring us into the 33% tax bracket. Our total income would be about $240,000.00. My thinking is that we would recap this loss in 2 years, plus we would no longer be struggling with our bills. We would still have $170,000.00 in the IRA to build on. In addition, we usually get a $20,000.00 tax refund.
What do you think of this strategy?

Thanks for your time and expertise.


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  • well I am going to be 59 1/2 in March and have 13,000 in credit card debt.   If I withdraw without penalty to pay off credit card debt and then increase my 401 K deduction to full 6,000 per year, will the tax break from the maximum savings offset the 30 percent paid to withdraw the $13,000?

  • From a pure finance standpoint, it can make a lot of sense to do this – draw out your traditoinal IRA early and take the penalty/tax hit to pay off high interest credit cards. and estimtate of 4 factors you needed to compute
    1)rate of interest on the credit card  ex. 15%
    2) rate of growth on the IRA  ex. 4%
    3) current tax rate plus 10% penalty    Ex. 50% (10% pen + 35% Fed + 5% state)
    4) and a wild guess at future tax rates (assuming you leave it in and draw penalty free).
         Ex. 30% (25% future fed + 5% state)

    Working thru a simplified example using the rates noted above..  John is 44.5  and it’s 15 years until age 59.5 years old to draw  IRA without penalty.  He has $10,000 in credit card debt paying at 15% for foreseeable future.  It would take a withdrawal of $20,000 from IRA to have $10,000 after the 50% tax hit to pay off that credit card debt. 

    If John doesn’t draw the $20,000 IRA and lets it grow at 4%, it will be worth about $36,000 in 15 yrs. He can then take it out penalty free and pay the tax of 30% and will net $25,200.

    Meanwhile, the $10,000 in credit card debt, assuming it sits left unpaid at 15%  – it grows and grows to approx $81,200 in 15 years.  About $56,000 more than what is in the IRA.

    Again, this is just from a pure finance standpoint – not considering future ability to budget, willpower to use the IRA for the debt,  refinance cc debt at lower rate, etc etc etc.

    Still,  it just shows the huge gulf between what investments are earning, vs the high interest credit credit card rates. 15% credit rate is actually on the low side for many.

    • We happen to be working on a calculator to help people see the impact of such loans as compared to bankruptcy and leaving the money alone and protected from creditors.

      Using the scenario you laid out, if the person did not borrow from their protected plan and filed bankruptcy instead the difference in value at age 59.5, assuming a $40,000 balance of the retirement account to begin with would be $191,421 with the bankruptcy route versus $174,963 with the loan route from a 401(k). The impact from an IRA withdrawal would be more since the loan would not be repaid and the tax hit would be greater.

  • Cody,

    I found
    this blog while searching if there would be a penalty for my husband and I to
    withdraw our IRAs to pay off our credit card debt. Here is our thinking on the
    subject (bear in mind that we are just regular business people and not
    financial experts) but everyone is talking about the cost of withdrawing the
    money as being 34-47%. That sounds really awful! But, the actual
    “penalty” portion of this percentage is 10%. So, whenever you
    withdraw the money you will still owe all of the taxes (unless it’s a Roth
    IRA). So, fed tax & state tax would need to paid regardless. Some would
    argue that because you are “retired” your income would be lower and
    therefore the tax percentage less, but this may or may not apply to your

    I don’t know about your IRA situation, but we moved our money from our 401K to
    an IRA in 2003 (when the company we worked for went out of business). Since
    that time we have made very little money on our IRA. In fact, it took us years,
    after the 2008 crash, to recoup our money. So, our money has been sitting in an
    IRA for 9 years and we haven’t made any money!

    On the
    other side of the coin, we owe about 55,000 in credit card debt. Our interest
    rates vary from 3.9% to 15.24% most are at around 10%. So, we
    “conservatively” pay $5,500 in interest every year and I believe the
    actual figure is even higher. We have been trying “unsuccessfully” to
    pay off our credit cards for 5 years. We also pay over $1000 per month in
    minimum payments, plus whatever additional we can throw at it. We make some
    progress and then BAM something happens and we have to repair one of our cars
    (which are both over 10 years old) and we ended up charging again. So, in that
    past 5 years we have paid over $30,000 in credit card interest and have nothing
    to show for it. And in the same 5 year period our IRA has not made any money at
    all. Not to mention all the stress of dealing with 7 or 8 credit cards to pay
    every month. Ugh!

    I have
    reached the point where I appreciate the advice that the experts are giving but
    for me, I need to “stop the credit card insanity”. We would love to
    refinance our home, but the banks will not approve it because of our credit
    card debt and debt to income ratio. So this is hurting us at every turn. We do
    not have as much money in our IRAs as your do (We only have about $80,000
    between my husband and I). We have already accepted that we’ll have to work
    until we die. Fortunately for us, we are self employed and good at what we do
    (and it’s the kind of work we can do so long as we can breath and talk). Also,
    it’s unrealistic to think that we could retire on $80,000 anyway! So, after
    thinking long and hard on the subject we have decided to cash out our IRAs, pay
    the 34 – 47% interest and penalty and pay off the credit cards!

    I’m in no
    way telling you this is what you should do, just sharing our thoughts on why we
    decided it made sense for us.

    Best of

    • I have just done the same thing. I think in the best case the traditional advice of not toughing the IRA is good. The reality is that you are going to pay taxes on the money whenever you withdraw it. SO in reality I am paying a 10% penalty to pay down the debt. Over a fairly short period of time I make this back through the reduction in interest paid on the credit cards. 

      Sometimes you have to think out of the box and ignore the traditional advice.

  • Hello Cody,
    The strategy might make sense. I know traditional wisdom always argues against taking money out of the IRA or other retirement account, however, I have successfully coached many consumers to get out of debt very quickly using that strategy. There are certainly pros and cons and many factors that come into play such as your age, retirement needs, credit needs etc. Perhaps it might make better sense to settle the debts vs paying them in full. We need to weigh your cash vs your credit needs to analyze that decision. There are several other questions that need to be weighed as well to determine the specific approach you should take.

    Dealing with the amount of money that you are dealing with, I wouldn’t feel comfortable offering specific advice unless I know a lot more details about your current situation, future needs, and overall mindset.

    If you would like to schedule a strategy session to review everything and put a plan together, you can set it up through my website.

  • Before dipping into savings, look at your budget and see if you can
    eliminate needless spending and put
    more money towards the debt. I helped my parents with this, and they cancelled magazine subscriptions, decreased cell phone plans, stopped eating out, etc and saved lots of money which they were able to put toward their debt. Little things here and there really do add up.

  • Cody,

    I don’t like it. if you pay a 10% penalty and 33% tax on the amount removed from your IRA that looks like a 43% cost for the money plus the loss of your retirement money. And, although I don’t know you, your description of your financial picture doesn’t make you sound like you’re the kind of guy to repay $80k to yourself over two years (even if IRA rules permitted it).

    Be honest with yourself. You have a lifestyle you can’t afford. Using your only savings to pay down debt leaves you without a safety net in the event of a real emergency and just makes it possible to continue to live beyond your means. You need to make serious changes now. I’m talking about moving to a less expensive home and lowering your style of living changes.

    A financial adviser can help develop a budget or you can call a credit counseling agency to get free advice. You can do this but not by borrowing. Any solution that has you borrowing, even from yourself, is an indication of failed financial planning.

    Good luck!

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