People with mountains of debt tend not to have a ton of options to pay it off. The exception being a pot of money in a 401(k) or IRA — money set aside and invested for retirement.
It’s that pot of money that usually begs the question — is it best to leave it there or use it to pay off debts?
Money in a 401(k) or IRA is different than money in a savings or brokerage account — pull it out before your of retirement age (59 1/2), and you’ll incur a tax penalty, generally 10%. You’ll also pay taxes on the amount you cash out on because the funds are from your pre-tax income.
It’s one of those tough questions that doesn’t have a black and white answer. We are taught that debt should be gotten rid of at all costs. We’re also taught never to touch our retirement fund.
We posed this tough question to budgeting expert and founder of City Girl Savings Raya Reaves during a recent Facebook Live in our Facebook Group “Let’s Talk About Debt” to get her take.
“So I’ve done that in the past, so that’s going to be my disclaimer,” Reaves shared of her experience paying off over $26,000 in credit card and personal loan debt. “I’ve definitely used 401(k) and retirement funds to help me pay off debt. I don’t regret it whatsoever. I just think a person has to keep in mind that you’re essentially doing your future self a disservice because you’re taking out funds that will no longer have the opportunity to grow and get returns. Granted, you will likely pay them back…But still, it could hurt your future gains…If your debt is just too overwhelming and you have the ability to do so…don’t think that you absolutely cannot [do this]. Just make sure you have a plan to pay yourself back.”
Reaves is the first to admit that this is a difficult choice.
“It’s tough, right,” she shared. “Because you know you likely have a nice balance in your retirement plan and you don’t wanna take it out, but you know you really can’t do much with debt. So, that’s where I came from when I decided [to withdraw from my retirement fund to pay off debt] and I don’t regret it.”
While this decision really depends on your unique situation, it is an important reminder that there is no shame in paying off your debt at all costs.
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