Using Retirement Funds to Pay Debt

Taking money, either in the form of a withdrawal or a loan, from your retirement savings such as an IRA, 401k, 403b, whole life insurance or other retirement savings plan.

Pros

  • You are borrowing only from 'yourself' to pay off debt.

Cons

  • You will incur penalties for early withdrawal from most forms of retirement savings. This usually means that you will owe taxes for the year in which you withdraw funds.
  • If you take a loan rather than a withdrawal, your company will deduct the payments for this loan from your paycheck and this may leave you with too little money, causing you to increase your debt.
  • If you cannot repay a retirement loan, it is then considered a withdrawal, with the same tax penalties associated with an early withdrawal.
  • Any funds taken now and not repaid will reduce your retirement savings.

What to Avoid

  • Avoid leaving yourself with too little money in your paycheck due to retirement loan repayments.
  • Avoid incurring tax penalties since these are new debts you will have to pay.
  • Avoid taking this step unless you know all of the consequences and are certain that this step will take care of all of your debt problems.

What to Look for

  • Look for a source of retirement savings that you can liquidate without incurring tax penalties for early withdrawal.

Potential Impact on Your Credit

Savings and investment accounts do not appear on your credit report, so taking money from a retirement fund will not affect your credit report or your credit rating. However, taking funds from a retirement account can result in tax debt, which may be shown on your credit and have a negative impact.