If you're carrying around high-interest credit card debt, you may be wondering what your best option is to pay down your debt quickly. One possibility is to use your retirement funds. If you have money in an individual retirement account (IRA), you can withdraw funds to pay off credit card debt and potentially save yourself thousands of dollars in interest.
List your outstanding credit card debts, from highest interest to lowest. Determine how much debt you want to pay off using your IRA.
Check your current IRA account statement to determine the total value of your account. There must be enough money in the account to pay off your credit card debts as well as your potential tax liability. Calculate what portion of the account's value is due to your contributions and make note of whether some or all of these contributions were deductible.
Calculate your estimated tax liability and withdrawal penalty. If your funds are held in a traditional IRA and you are not age 59 1/2 or older, you are subject to a 10 percent early withdrawal penalty, and the amount of the distribution is subject to regular income tax at your current tax bracket. If your funds are in a Roth IRA, you face a 10 percent early withdrawal penalty on earnings as well as the regular income tax. You can make withdrawals of contributions penalty-free if the account has been open at least five years. Compare your previous year's income statements or tax return to the IRS Tax Table to determine your income tax bracket.
Call the company that holds your IRA or go to the company's website and request a distribution form. If you don't need to withdraw the full amount of funds in your IRA, ask whether the company allows partial withdrawals. Once you receive the distribution paperwork, fill it out completely and return it along with any required supporting documentation. You will also need to indicate how you wish to receive your IRA funds, either through a check or direct deposit.
Once you receive payment, contact your creditors to pay off your outstanding balances. Have each creditor send you a final statement acknowledging that your account is paid in full.
Items you will need
- Current IRA account statement
- List of outstanding debts
- Income statements
- Prior year's tax return
- IRA distribution forms
Consider other options such as debt consolidation, debt settlement or debt management plans before making an IRA withdrawal.
Keep copies of all paperwork related to the withdrawal for your taxes.
Carefully weigh the amount of money you will save in interest versus the potential tax penalty you will have to pay. Withdrawing funds from your IRA reduces your retirement savings, and it may take years to replace the money.
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