Should You Raid Your IRA to Pay Off Debt? Here’s what Dave Ramsey thinks
You may be surprised at the answer to this question from the debt-fighting finance guru.
- Dave Ramsey thinks you should try to work aggressively to get out of debt.
- However, he does not advise withdrawing money from an IRA to pay off your debt.
- There are penalties and other consequences that make withdrawing money from an IRA a bad idea.
Finance guru Dave Ramsey is perhaps best known for his aversion to debt. He advises his readers and listeners to avoid borrowing under virtually all circumstances and suggests making debt repayment a top financial priority.
Although Ramsey recommends making many sacrifices, including eating beans and rice, on the road to debt relief, he thinks there are certain financial steps you shouldn’t take to say goodbye to your debt. Looting an IRA to pay off a debt is one of them.
Ramsey doesn’t believe you should take money out of an IRA to pay off your debt
If you have high-interest debt, such as vsstyle=”text-decoration: underline”>credit card debt it can be tempting to try to access all the money you have to pay down your balance and stop sending money to creditors every month.
This is especially true if you have a lot of money in an IRA or another type of retirement account. It may seem like the money is sitting there when you won’t need it for decades, even though you’re paying high interest on your cards.
The reality, however, is that you might really end up regretting taking money out of your retirement accounts – which is why Ramsey’s blog calls it a “terrible idea” to plunder those accounts for debt repayment. .
In fact, the only time Ramsey thinks it’s advisable to withdraw his retirement funds early is to avoid bankruptcy or foreclosure.
Why is using IRA funds for debt repayment a bad plan?
So why shouldn’t you use the money you’ve invested for retirement to try to free yourself from your creditors today? Ramsey points out several reasons why this is such a bad idea.
First, if you withdraw money before age 59.5, you are likely to incur a 10% penalty tax, unless you fall under a limited exception that allows early withdrawals. And as Ramsey explains on his blog, you’ll also face federal and state taxes at your ordinary rate on the money withdrawn. With all those taxes, you’ll end up with a lot less money than you took out to pay off your debt in the end.
Second, Ramsey suggests that even if you are allowed to withdraw money without penalty – perhaps because you fall into one of the exceptions – it’s not necessarily a good idea, as it will make it more difficult to prepare of retirement. “Don’t steal your future self just because it’s easy right now,” Ramsey warns.
Ramsey shows on his blog that an early withdrawal leads to a loss of all the money your invested funds would have earned over time. The initial investment you make can grow significantly due to compound interest, with a $50,000 IRA contribution growing to over $544,000 over 20 years. You would lose those winnings if you took money to pay your debts now.
Ramsey is absolutely right about all these downsides of using IRA money for debt repayment, and you should probably listen to the financial expert and leave your retirement funds alone.
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