Using Your IRA to Pay Off Debt: Risks and Alternatives
Sunday, June 29, 2025
Some people facing credit card debt may wonder if dipping into their retirement savings — such as an IRA — offers a quick way to pay what they owe and get relief.
While that money may feel accessible, taking it out early often triggers taxes, penalties and long-term financial consequences.
Before using an IRA to pay off debt, it’s important to understand the risks to doing so, and to consider safer ways to manage what you owe.
An individual retirement account (IRA) is a place to save money that can help you cover expenses in retirement.
With an IRA, the government offers tax breaks to encourage long-term saving. In return, it sets rules for how and when you can withdraw that money.
If you withdraw funds before the age of 59½, you may face serious financial penalties.
With a traditional IRA, your contributions are usually tax-deductible, and your investments grow tax-deferred. But once you start withdrawing money, the IRS treats it as regular income.
If you’re under the age of 59½ and take an early withdrawal, you’ll usually have to:
For example, if you withdraw $10,000 and your tax bracket is 22%, you will owe $2,200 in income tax—plus a $1,000 penalty. That means you will lose $3,200 right off the top.
There are limited exceptions to this rule. For example, you might not owe a penalty if you withdraw the money for specific medical costs or higher education expenses.
However, paying credit card debt doesn’t qualify for one of these exceptions.
Roth IRAs are funded with money on which you have already paid taxes. That means you can take out your original contributions at any time, for any reason, without penalty.
On the other hand, withdrawing earnings before age 59½ usually triggers:
You also cannot make penalty-free withdrawals unless you have a Roth account that has been open for at least five years. This is true regardless of your age.
Many people don’t realize that even if your Roth has $20,000, only part of that may be penalty-free. If $5,000 of it is investment growth, touching that portion too early could cost you.
As with a traditional IRA, there are some exceptions to those rules.
Tapping your IRA to pay off debt can seem like a solution when you’re overwhelmed. However, in most cases, it just shifts the problem to your future self. Here is why:
Taxes and penalties can shrink your withdrawal by 20% to 30% or more. So, even if you think $10,000 will cover your credit card balances, the actual payout might fall short—and leave you with a bigger tax bill come April.
This can be especially painful if the withdrawal bumps you into a higher tax bracket or causes you to lose eligibility for tax credits or benefits.
IRA funds are meant to grow over decades through compound interest. Every dollar you withdraw now is a dollar that won’t multiply later.
Let’s say you pull out $10,000 in your 40s. If that money had stayed in your IRA and earned just 6% a year, it could grow to more than $32,000 by the time you’re 65.
That’s a steep trade-off for a short-term fix.
Before using retirement savings to pay off debt, it’s worth exploring options that can ease your financial burden without compromising your future.
These strategies may not offer instant relief, but they could help you regain control over time:
A debt consolidation loan lets you combine several credit card balances into one fixed monthly payment. If you qualify for a lower interest rate than you’re currently paying, this could save you money and shorten your repayment timeline.
For example, if you’re paying 20% APR across several cards but qualify for a consolidation loan at 10%, the difference in interest costs could be significant over time.
This option is best for people with steady income and fair-to-good credit.
Things to watch for:
Balance-transfer cards temporarily offer low or 0% interest on balances transferred from other credit cards. The promotion period usually lasts for 12 to 18 months.
During this promotional window, your payments go entirely toward the principal, which can help you chip away at debt faster.
This option may be worth considering if:
Keep in mind:
If you’re unsure where to start, a non-profit credit counseling agency can help you assess your situation. Certified counselors review your income, expenses, credit history and debt level to help you make a plan.
You don’t need to be in crisis to get help. These agencies can support you in:
Look for agencies accredited by organizations such as the National Foundation for Credit Counseling (NFCC) or the Financial Counseling Association of America (FCAA).
If your debt is becoming unmanageable, a credit counselor might suggest enrolling in a debt management plan (DMP). This involves making a single monthly payment to the agency, which then pays your creditors.
Benefits of a DMP may include:
Unlike debt settlement, a DMP doesn’t reduce the amount you owe, but it can make repayment more manageable and reduce overall interest costs.
You’ll typically need to close or pause use of your credit cards while enrolled.
Most financial experts warn against using retirement funds to pay off debt. But in some situations, people decide it’s their best or only option. These cases are often driven by urgent, high-stakes circumstances such as the following:
If you’re facing the loss of your home or about to file for bankruptcy, an early IRA withdrawal might seem like the only way to stay afloat.
Some individuals use retirement funds as a last resort to bring mortgage payments current or settle debts that could otherwise lead to legal action.
That said, this move comes with major downsides:
Before going this route, it’s worth exploring whether a non-profit housing counselor, bankruptcy attorney, or credit counselor can help you find alternatives.
Unexpected medical bills are another common reason people consider early IRA withdrawals.
While the IRS does allow penalty-free withdrawals for unreimbursed medical costs that exceed a certain percentage of your income, you’ll still owe income tax on that money.
You may have other options, such as:
Even in emergencies, your retirement account should be one of the last places you turn.
If you’re feeling overwhelmed by debt, it’s understandable to want fast relief. But tapping into your retirement savings can create more problems than it solves.
Before going down that road, consider taking these steps first.
Start by reviewing your income and expenses to see where you might cut costs or redirect money toward debt. Some strategies include:
Even small adjustments can free up money you can put toward debt. This can help you avoid long-term setbacks from making early withdrawals in retirement accounts.
You’re not alone, and there’s no shame in asking for support. Depending on your situation, you might benefit from:
Many of these professionals offer free consultations, and non-profit agencies typically charge very little for ongoing support.
There may be assistance programs you qualify for that you haven’t yet considered. These could include:
Tapping into these resources may help reduce pressure in the short term so you can keep your retirement savings for when you’ll really need them.
Using your IRA to pay off credit card debt might feel like a quick fix, but it often trades a short-term win for long-term harm.
Between taxes, penalties and lost future growth, early withdrawals can set you back years in retirement planning.
Before tapping into retirement savings, explore other ways to manage your debt. There are resources and strategies that can help—whether it’s restructuring what you owe, finding expert guidance, or tightening your budget in the short term.
Your future self will thank you for pausing, planning and protecting what you’ve worked hard to build.
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