This is a common question that frequently crosses our desk. Individuals with credit card debt often consider withdrawing from their retirement accounts to pay down debt. While this may seem like a simple decision, there are many factors and costs to consider before withdrawing.
The interest rate isn’t the only factor
On the surface, it may seem like this is an easy decision since a 15% annual interest rate on credit card debt is greater than the 5-7% you earn on your retirement income. However, there are more costs to consider. If you withdraw from your retirement account, you will owe federal and state incomes taxes. The amount of taxes you will owe, depend on what ordinary income tax bracket you are in and where you live. For instance, if you withdraw $10,000 from your retirement account, that can quickly turn to only $7,000 after factoring in federal and state incomes taxes of say 25% at the federal level and 5% at the state. What’s more, if you withdraw from your retirement account before reaching 59 1/2, you will be taxed an additional 10% on the withdrawal. Therefore, that $7,000 has quickly turned to $6,000 and you’ve effectively lost 40% of your retirement withdrawal to taxes. In addition, you will lose out on the compounding interest in your retirement account.
What other retirement income do you have?
Unless you have a significant amount of retirement income in other places, generally it is not recommended to withdraw from your retirement account to pay down credit card debt. There are certain situations in which you may need to consider withdrawing from your retirement income. If it means avoiding filing for bankruptcy, then it may be considered.
Do you have any other questions? Ask your credit card debt questions online.
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