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Should you use retirement funds to pay off debt?

May 13, 2025
Last revised: May 13, 2025

If you have debt you'd like to pay off, your retirement savings may seem a good source of funds. But keep in mind the potential downsides before you take money from a 401(k) or IRA.
PhotoAlto/Eric Audras/Getty Images/PhotoAlto

Key takeaways

  1. If you've been saving for retirement, your retirement accounts may look like a good source of funds if you need to pay off debt.
  2. However, pulling from your retirement funds early can bring short- and long-term consequences.
  3. Alternatives to manage or pay off debt include obtaining a second mortgage or personal loan, consolidating your debt or paying it off over time.

If you have high credit card balances, student loans or a mortgage, it's tempting to use retirement funds to pay off debt. But whether you're considering taking an early withdrawal or you're retired and eager to get rid of that monthly mortgage payment, it's not typically the best use of your funds.

We'll explain why using retirement funds for debt repayment may not be the right choice, how best to pay down debt with your retirement savings if you do decide to take that path, and alternative ways to manage your debt. We'll also explore how to think about holding debt in retirement.

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Should you use retirement savings for debt repayment?

Generally, using retirement savings to pay down debt is not recommended. When you take money from a retirement plan early, you not only reduce your savings, you also lose out on potential tax-free compound interest, which allows your investment to grow at an accelerated rate over time. Money invested in a Traditional 401(k) or IRA plan grows tax-deferred, meaning you don't pay taxes on your earnings until you begin withdrawals.

Let's say you're 40 years old and have $100,000 saved in a 401(k). If you leave all that money in the plan for 25 years at an 8% annual return, you will have $684,848 at age 65, without factoring in any additional contributions. But let's say you decide to take $50,000 out of your $100,000 balance to pay off debt. Before paying any taxes or penalties, your savings only will grow to $342,424 by age 65, before penalties and taxes triggered by early withdrawal.

Penalties and tax implications of early retirement withdrawals

Retirement plans offer the ability to reduce your taxable income today and provide tax-deferred growth to encouraging people to save for the future. But withdrawing money early from a retirement account such as a Traditional 401(k) or IRA results in a 10% penalty and a potentially hefty tax bill. These penalties can significantly reduce the amount available for debt repayment.

If you're 59 1/2 or older, your withdrawals won't trigger the 10% penalty, but your withdrawal still will be taxed as income at your current tax rate.

Using your 401(k) or IRA to pay off debt

If you decide to take money from your 401(k), you may have a second option to a direct withdrawal, if the plan document allows. A 401(k) loan allows you to borrow up to 50% of your vested balance in the plan or $50,000, whichever is less. Note that you typically have to repay the borrowed amount within five years. You also will pay interest, but the interest goes into your account. Your plan also may require you to pay back the entire loan once you leave your employer—and research shows that 86% of workers default on 401(k) loans after leaving a job.

Taking money from a Roth IRA

Roth IRA accounts have an exception that allows you to take out your contributions tax- and penalty-free at any time. Still, by withdrawing Roth funds early, you risk missing out on tax-deferred savings growth. If you hold a Roth account and decide to pay off debt, the most effective strategy is to take out the money you need, pay off that debt and then quickly replace the money in your Roth account. This method will hurt your retirement savings the least.

Alternatives to using retirement money to repay debt

If you need to repay debt, consider alternatives to using retirement funds. The best option for you depends on your personal financial situation, the type of debt and how much debt you owe. Many factors such as home ownership, life insurance ownership and credit rating influence your choices. Explore options like personal loans, second mortgages and debt consolidation.

As you think about whether to save for retirement or pay off debt, keep in mind that not all debts are the same. First evaluate the difference between good and bad debt. There are benefits to keeping low-interest "good" debt, such as mortgages or student loan debt, and paying them off slowly. For instance, with each mortgage payment you make, you own a bit more of your property. On the other hand, "bad" debt—including interest-accruing credit card balances and payday loans—generally provides no long-term benefits and keeps you underwater.

Here are some ways to tackle debt without dipping into your retirement savings:

Personal loan

Are you trying to pay off a high-interest debt? Obtaining a personal loan at a lower interest rate can help you pay off that debt and reduce your overall debt cost. You can apply for a personal loan at a bank or credit union.

Second mortgage

If you own your home and have built up some equity value, you may be able to access funds through a home equity loan, or second mortgage. With this type of loan, you can access a lump sum of cash to pay off debt, often at a relatively low interest rate because your property backs the loan. You repay this loan in monthly payments, similar to your existing mortgage terms.

Life insurance

Permanent, or whole life, insurance policies build up cash value over time. You can withdraw some of that cash value to pay off debts without having to repay what you withdrew. However, you will reduce the policy's eventual death benefit.

Opening a new credit card

If you have credit card debt and a high credit score, you can transfer your balance to a new card with a low, or even 0% APR. Moving your debt won't decrease what you owe, but it can reduce your total cost by lowering the interest it accumulates.

Another option is merging your credit card balances into one account with debt consolidation. If you apply and are accepted for a fixed-rate consolidation loan, your rate won't change for the life of the loan.

Be sure to carefully consider your situation before acting. A financial advisor can help you determine a debt repayment strategy that also considers your future financial needs.

Should you pay off debt before retiring?

If you're approaching retirement with a mortgage left on your home, you may be wondering if you should just pay off it off before you retire. There are pros and cons, depending on your situation.

Reasons to have a mortgage in retirement:

  • You hold a fixed-rate mortgage with a rate that's lower than the current rate of inflation. That means you're repaying your mortgage with dollars that don't go as far as they used to.
  • You may need to borrow money in the future. If you anticipate future expenses such as paying for a child's wedding or major home repairs, obtaining a second mortgage or tapping a home equity line of credit could be a cheaper option than credit card debt.
  • If you itemize your tax deductions and claim mortgage interest as a deduction, holding the mortgage may help you save on taxes.

Reasons to pay off your mortgage before retiring:

  • The inflation rate is lower than your mortgage rate. If you have enough savings to cover your projected retirement expenses and a healthy emergency fund, then paying interest to maintain your mortgage may not be necessary.
  • You claim the standard deduction on your taxes and can't deduct your mortgage interest.
  • You won't feel comfortable holding a mortgage in retirement.

You can reduce debt before reaching retirement without tapping into your retirement savings. Look for ways to cut expenses to free up money you can put toward debt. Cooking meals at home, moving into a less-expensive home, spending less on travel and entertainment and putting any extra money toward what you owe can all help chip away at your debt.

Conclusion

You should avoid using your retirement funds to pay off debt whenever possible. Still, everyone's financial situation is different, and you should understand and consider all your debt repayment options before choosing one. A Thrivent financial advisor can help you balance paying off your debt while saving for retirement and other financial goals.
Concepts presented are intended for educational purposes. This information should not be considered investment advice or a recommendation of any particular security, strategy, or product.

Hypothetical example is for illustrative purposes. May not be representative of actual results. Past performance is not necessarily indicative of future results.

Thrivent and its financial advisors and professionals do not provide legal, accounting or tax advice. Consult your attorney or tax professional.

Roth IRA contributions are not tax-deductible, but withdrawals of contributions and earnings are tax-free, if you follow the rules. To withdraw earnings without penalties, you must first have the account for five years and be age 59½.

Loans and surrenders will decrease the death proceeds and the value available to pay insurance costs which may cause the contract to terminate without value. Surrenders may generate an income tax liability and charges may apply. A significant taxable event can occur if a contract terminates with outstanding debt. Contact your tax advisor for further details. Loaned values may accumulate at a lower rate than unloaned values.
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