Should I use an early IRA distribution to pay off my credit card balance?

Does it make sense to withdraw approximately $10,000 from my IRA and suffer the 10% tax hit on the amount in order to pay off $10,000 of credit card debt that's subject to 16% APR?

Debt, IRAs
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December 2017

Great question. Generally withdrawing early is frowned upon in financial circles- often because it is unwise for the client, sometimes because the manager is worried about assets under management. The underlying question is can I pay the taxman more right now so that I can pay the Bank less. 

Let's look deeper at the numbers to determine what is right* for you (*this is hypothetical given I don't have all your financial information and is done in rough numbers for education purposes only).

If you withdraw $10,000 you will only take home roughly $7,500 after 15% tax and 10% penalty assuming you make ~$45,000 a year or less. If you need the full $10,000 and have it available in your IRA, then we would need to take $13,350 to get the $10,000 you need to payoff the card balances. Total cost = $3,350 taxes. 

(Again, if you are making $97,000 or less that could be closer to $15,000 withdrawal with a $5,000 cost)


Pay $500 a month over the next 2 years to pay off the cards.  Total cost = $1,709 interest

(However, if it takes you more than 3.8 years to pay off the loans then your total interest cost increases to $3,400!)

In summary, the rough numbers seem to suggest that you'd be better off cutting money out of some other part of your budget to set up an accelerated payment plan rather than take the withdrawal.

December 2017
December 2017
December 2017
December 2017