Should I Use My Roth IRA to Pay Off Debt?

Q: I am trying to pay off some debt to become debt free. I'm 44 years old. Is it possible, at my age, to withdraw from my Roth IRA to pay off debt? – James, Nashville, TN

A: Yes, you can withdraw money from your Roth IRA to pay off debt. But it is rarely a good idea to tap money earmarked for your retirement.

First, you should understand the rules. IRS regulations allow you to withdraw your contributions from a Roth IRA without incurring a penalty, since you’ve already paid taxes on that money. But if you withdraw earnings on those contributions, and you are under age 59 1/2, you will incur a 10% penalty and income taxes. “That’s a hefty price to pay,” says Ed Slott, founder of IRAhelp.com.

You have to weigh the benefit of erasing high-cost credit card debt with the impact on your future retirement income. And that impact could be significant. Roth savings are an especially valuable stream of retirement income because they offer both flexibility and tax diversification. After age 59 1/2, if you've kept the money in the account for five years, all withdrawals are tax free. Moreover, Roths aren't subject to required minimum withdrawal rules after age 70 1/2, like traditional IRAs. That means you can pull out a large sum for a health emergency in retirement without worrying about taxes. And if stock prices plummet, you won't be forced to make withdrawals at a market bottom.

At age 44, you’ve got two decades till retirement. Even if you withdraw a small amount, it will end up costing you a lot when you consider the 20 years of compounded growth you are giving up. Look for other ways to free up cash to pay down the debt. Do you have expenses you can cut back on? Can you drum up some extra income? If you do decide to use the Roth, stick with contribution withdrawals so you don’t lose money to penalties and taxes.