Financial Advice Q&A

Occasional Visitor
samson4074
Posts: 1
Question
Can I use my IRA to pay off debt?
[ Edited ]

How much is the penalty for using IRA funds? Can I use them to pay off a loan?

Other Answers: 1
Community Manager
JosephMontanaro
Posts: 62

The answer to the second part of your question is yes.  You can pull money out of your IRA and do whatever you'd like to do with it--including paying off a loan.  However, the answer to the first part of your question may have you thinking twice about making that type of move.  Here's why.

 

In most cases, if you withdraw money from your traditional IRA before age 59 1/2 you'll have to pay income tax on what you pull out plus and additional 10 percent penalty.  Of course, depending on where you live, you may also have to pay state income tax on the same withdrawal. The bottom line is that it could be pretty painful, from a tax perspective, to remove money from your IRA before normal retirement age.

 

There are exceptions to the additional 10% penalty rule, but there's no getting around paying the tax.  A quick sit down with a tax professional would allow you to determine exactly what type of tax impact tapping your IRA would have, but in many situations, I've seen folks decide that the reality of having to pull $10,000 out of their retirement savings just to realize $7,000 is enough to have them looking for other ways to attack their debt.

 

Good luck! 

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