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.

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
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
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
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
Alternatives to using retirement money to repay debt
If you need to
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
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
Life insurance
Opening a new credit card
If you have credit card debt and a
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.
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