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.
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.
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.
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:
401(k)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.
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
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.
Don’t think an IRA advance is right for you? Consider these alternatives instead:
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.
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 adviser 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.
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