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Should you use your IRA to pay off debt?

How and if you should withdraw from your retirement funds ahead of schedule.

Using money from your IRA is one way to pay off your debt. But depending on your age and the type of IRA you have, you might have to pay steep taxes and penalties for withdrawing early. And it’ll be a huge setback when it comes to saving for retirement.

Should I withdraw money from my IRA to pay off debt?

Whether or not you should make an early withdrawal from your IRA depends on your unique situation. While it’s a viable option to pay off debt, there are some downsides. Many IRAs — though not all — have early withdrawal penalties, so you might not have access to as much funds as you think.
Even if your IRA doesn’t have early withdrawal penalties, you’ll likely still have to pay income taxes on the amount you withdraw if you’re under 59 and a half. You’ll also lose access to funds you would’ve had for retirement — even if you file for bankruptcy.

What are the penalties for withdrawing early?

The penalties for early withdrawal vary depending on what type of IRA you have, your age and your financial situation. Generally, early withdrawal is considered a withdrawal before the age of 59 and a half.

Traditional IRA

A traditional IRA is your standard retirement account that allows you to make tax-free contributions until you’re 70 and a half years old. In addition to being tax-free, contributions are also typically tax-deductible.
Generally, the early withdrawal penalty for a traditional IRA is 10% of the withdrawal amount. Additionally, you also have to pay income taxes on any funds you take out ahead of time.

Roth IRA

A Roth IRA is a retirement account you can contribute to no matter your age, as long as you and your spouse make an income below a certain limit. The early withdrawal penalty for anyone under the age of 59 and a half is typically 10%. You’ll also have to pay income taxes on any funds you withdraw before that age.

Exceptions to Traditional and Roth IRA withdrawal penalties

There are some exceptions to who the early withdrawal penalty applies to with both types of IRAs. If you pay off debt using IRA funds, the penalty is unavoidable unless you’re:

  • Over 59 and a half
  • Someone with a permanent disability
  • Military reservist called to active duty


A 401(k) is a retirement plan that’s tied to your job — you contribute a percentage of your personal income, which goes toward an investment portfolio. Employers sometimes match those contributions. Similar to other retirement plans, generally anyone under 59 and a half must pay a 10% penalty and income taxes on withdrawals.

401(k) loans to avoid early withdrawal taxes and penalties

The one way you can get around the early withdrawal taxes and penalties is to take out a loan against your 401(k). This is a low-interest loan up to $50,000 that you pay back into your own account. You can often use this for anything — including paying off debt — though some employers might have restrictions.
However, you might want to think twice before taking out this loan. You’ll lose out on returns on investments, and you’ll have to repay the loan by the due date of your next tax return if you lose your job.
Weigh the risks and benefits of 401(k) loans

How do I withdraw money from my IRA?

How you withdraw your money depends on the financial institution that holds your IRA. Typically, you’ll follow these steps:

  1. Consult a tax expert. Most investment banks recommend that you make sure you understand how much you could lose by talking to a tax expert before you decide to make an early withdrawal.
  2. Reach out to your investment bank. Different banks have different procedures. Some allow you to withdraw your funds online, while others might ask you to get started over the phone or fill out a paper form.
  3. Apply to withdraw. Generally, you need to provide information on how you’d like to receive the funds, how much you’d like to withdraw and any state and federal tax withholdings.
  4. Wait to receive your funds. Depending on your payment method, you could receive your funds anywhere from the next day to the next week.

What are the pros and cons of paying off debt with my IRA?

Paying off debt with an early IRA withdrawal isn’t always the right option for everyone. Weigh the pros and cons before making a decision.


  • Get out of debt quicker. You can potentially pay off all your debt at once if you have enough funds in your IRA.
  • No repayments. Unlike other options like a debt consolidation loan, you don’t have to make any repayments with an early IRA withdrawal.
  • Exceptions to early withdrawal penalties. While most people have to pay a penalty, you might not if you’re disabled, an active-duty service member or meet certain age requirements.


  • Most likely expensive. You’ll most likely need to pay income taxes and a 10% fee on the money you withdraw early.
  • Lose retirement savings. Taking money out of your retirement fund means you’ll have less of a nest egg — and you might have to work longer.
  • Higher tax bracket. By adding your early withdrawal to your income, you could end up paying a larger portion of your income in taxes than you would have otherwise.

Alternatives to using your IRA

Don’t think an IRA advance is right for you? Consider these alternatives instead:

  • Balance transfer credit card. Transfer your debt to a new card to manage your payments — often with a promotional 0% APR.
  • Debt consolidation loan. Condense your debts into one payment over a set period — ideally with more competitive rates and terms.
  • Debt snowball method. Strategically pay off your debt, starting with the smaller accounts and working your way up.
  • Debt relief. As a last resort, you can hire a debt relief company to negotiate better rates and terms or lower your balance for a full repayment.

IRA uptake with US adults

Do you have an IRA?

Response% of Americans
I do not have this, but plan on getting it in the next 6 months13%
I do not have this nor plan on getting it56%
I currently have this31%
Source: Finder survey by Qualtrics of 2,033 Americans

About one in three (31%) American currently say that they have an IRA.

Bottom line

Withdrawing from your retirement account early can get you out of debt faster, and you may not have to pay a penalty if you meet certain criteria. But most people are penalized — in addition to losing part of their savings.
Not sure it’s the best choice for you? Check out our guide to debt consolidation to learn about your other options.

Frequently asked questions

Can I take money out of my IRA and put it back in 60 days?

You can — and you won’t have to pay any taxes or fees as long as you return the money to an investment account within 60 days. This is known as a rollover and can apply to transferring funds to a different account or returning them to the same one. How this works can get tricky, so you might want to consult a tax advisor first.
Does an IRA withdrawal count as earned income?
It does, unless you meet the criteria for exemption from taxes and fees. This not only means you’ll have to pay taxes on the funds you withdraw, but you could also end up in a higher tax bracket because of the additional income.
How much can I take out of my IRA without paying taxes?
There’s no maximum you can withdraw from your IRA without paying taxes. Whether or not you pay taxes depends on whether you meet the criteria to qualify for a tax- and fee-free early withdrawal.
Picture: Shutterstock

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Anna Serio was a lead editor at Finder, specializing in consumer and business financing. A trusted lending expert and former certified commercial loan officer, Anna's written and edited more than 1,000 articles on Finder to help Americans strengthen their financial literacy. Her expertise and analysis on personal, student, business and car loans has been featured in publications like Business Insider, CNBC and Nasdaq, and has appeared on NBC and KADN. Anna holds an MA in Middle Eastern studies from the American University of Beirut and a BA in Creative Writing from Macaulay Honors College at Hunter College, CUNY. See full bio

Anna's expertise
Anna has written 251 Finder guides across topics including:
  • Personal, business, student and car loans
  • Building credit
  • Paying off debt

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