You may be surprised by the answer to this debt finance guru question.
- Dave Ramsey believes that you should try to work aggressively to get out of debt.
- However, he does not advise taking money out of an IRA to pay off your debt.
- There are penalties and other consequences that make withdrawing money from an IRA a bad idea.
Finance guru Dave Ramsey is perhaps best known for his aversion to debt. He advises his readers and listeners to stay away from loans in virtually all circumstances, and suggests making paying off debt a top financial priority.
While Ramsey recommends making plenty of sacrifices, including eating beans and rice, on the road to debt freedom, there are some financial moves he doesn’t think you should make in an effort to say goodbye to debt. Raiding an IRA to pay off debt is one of them.
Ramsey doesn’t think you should take money out of an IRA to pay off debt.
If you have high-interest debt, such as Cstyle=”text-decoration: underline”>credit card debtIt can be tempting to try to access whatever money you have to pay off your balance and stop sending money to creditors each month.
That’s especially true if you have a lot of money in a GONNA or another type of retirement account. It can feel like the money is just sitting there when you won’t need it for decades, even if you pay a high interest rate on your cards.
The reality, however, is that you could actually end up regretting taking money out of your retirement accounts, which is why Ramsey’s blog refers to raiding these accounts to pay off debt as a “terrible idea.”
In fact, the only time Ramsey believes it’s advisable to withdraw retirement funds early is to avoid bankruptcy or foreclosure.
Why is it a bad plan to use IRA funds for debt repayment?
So why shouldn’t you use the money you’ve invested for your retirement to try to get rid of your creditors today? Ramsey points out several reasons why this is a bad idea.
First, if you withdraw money before age 59½, you’ll likely incur a 10% tax penalty, unless you fall under a limited exception that allows early withdrawals. And as Ramsey explains on his blog, you’ll also pay federal and state taxes at your regular rate on the money withdrawn. With all these taxes, you’ll end up with a lot less money than you took out to pay off your debt when all is said and done.
Second, Ramsey suggests that even if you’re allowed to withdraw money without penalty, perhaps because you fall under one of the exceptions, it’s not necessarily a good idea, because it will make it more difficult to prepare for retirement. “Don’t steal your future self just because it’s easy now,” warns Ramsey.
Ramsey shows on his blog that an early withdrawal results in the loss of all the money your invested funds would have earned over time. The initial investment he makes can grow substantially due to compound interest, with a $50,000 IRA contribution that could grow to more than $544,000 over 20 years. You would lose those earnings if you took out money to pay off the debt now.
Ramsey is absolutely right about all of these downsides to using IRA money for debt repayment, and you should probably listen to the financial expert and leave your retirement funds alone.
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