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Using Retirement Funds to Pay Your Debt = Big Mistake


Should I Use Retirement Savings to Pay a Credit Card

The answer is almost always “no.” Debt collectors like to suggest this avenue to getting your debt paid and will push you to do this. You should definitely ask yourself the following questions before doing this:

1. Will  you owe tax on withdrawn amounts?

2. Is this one debt is really just part of a much larger problem such that solving this problem still leaves you with a larger, unworkable problem?

3. How many years of work are you likely to have to replenish the amount you are considering using to pay debt?

4. Do you have other retirement plans or pensions from a job which will help make up the difference?

5. What lead to this problem with this debt? Are you likely to have other problems in the next 5-10 years which will put you right back in the hole financially?

I would say question number 2 is likely the most important question. If this debt is only part of a much larger problem, you are likely setting money and your financial piece of mind on fire by using retirement funds to pay a debt. If you are 35, earn 80k a year and have an $8,000.00 debt problem, then the idea may make some sense. But if you are 50 , have $30,000 in debt and no backup, paying your credit card with a retirement withdrawal or loan is a horrible idea.

Creditors will try to convince you that not getting the debt paid is the worst thing you can do , that your credit rating is the end all and be all of your existence. Get independent advice, I can assure you that the person pressuring you to cash in retirement funds in order to pay a debt does not care about you and your family. They are trying to get a return on an investment they made, in your misery.

Debt collectors often buy these types of defaulted debt for pennies on the dollar and then spend years trying to get you to pay. Insert a professional between yourself and these aggressive collectors. There are many ways to handle the problem but cashing in retirement funds to take care of it is almost always the wrong answer.