Should You Consider Withdrawing From A Roth IRA To Repay Debt?
Debt can play hell on your emotions, especially when everyone around you is dealing with the same problems. Credit card and other large lending institutions capitalized heavily over the last 10 years, by utilizing a non-transparent structuring of fees, penalties, and other contractual obligations that left the end user paying the price. These fees and penalties helped to push the United States into the highest debt to income ratio that the country has seen in centuries. Withdrawing from a Roth IRA or your 401k is one method some consumers are using to pay off their credit card debt.
If you have been contributing into any investment accounts, like a 401k or Roth IRA, you may have some options to get the creditors off your back, and continue to try to salvage what’s left of your dignity. There are a few questions that you’re going to have to ask yourself first before you make any sudden decisions that could affect your savings and portfolio.
First, are the investment accounts that you’ve paid into at a level where you’ll see substantial returns if you decide to close them, and use the funds to pay off your debt? If you’ve paid in long enough, and your initial contributions have grown at an acceptable rate for you, then you can consider weighing the costs of pulling the money out against what it means to get out from under your debt.
Next, you need to examine the full amount of debt that you really have. Include everything from gas cards, Internet subscriptions, monthly club fees, the works. All of these expenses need to be included in your monthly statements to develop a firm grasp on exactly how much money you are spending. Once you’ve gotten this information, you can determine whether or not it is worth it to withdraw the funds from the IRA, or if you should think of other options for repaying the debt.
Another question to think about, and run your portfolio against is whether or not this is a wise move from a tax perspective. The amount that you are going to pay back in penalties, fees, and taxes could be upwards of 40% or higher. If this is going to cause you to fall short of the total amount of debt that you owe, you may benefit more from knuckling down and getting a bigger chunk of the debt repaid using other methods.
While it may seem like there is a lot to consider, these are some of the bigger questions that you should answer before you consider withdrawing from a Roth IRA. There are large taxes, fees, and early withdrawal penalties associated with pulling funds from your IRA that could make it even harder for you to get ahead. Depleting your IRA without being able to completely repay the debt is setting yourself up for more hardships down the road.