How to Use IRA to Pay Off Credit Card Debt

An IRA is an individual retirement account that you can open to help you manage assets such as mutual funds, stocks, bonds and 401k rollovers. The money contained in your IRA is intended to be used during retirement. For individuals with high credit card debts, however, funds contained in an IRA can have another useful purpose: paying down balances. Because an IRA will usually allow you to offer a lump sum payment to your creditors, you may be able to actually save money by cashing in the IRA, paying your debts and reinvesting any remaining funds.

Instructions

1

Calculate any tax penalties you will owe before withdrawing funds from your IRA. Your tax penalties will vary depending on your age, the age of the IRA and the type of IRA you have. The standard penalty, however, is 10 percent. Knowing your tax obligation ahead of time is helpful as it lets you know exactly how much money you will have after the withdrawal to bargain with your creditors.

2

Contact the company that services your IRA to see if you are eligible for a partial distribution. A partial distribution occurs when you withdraw only a portion of your retirement funds. Not all IRA programs allow partial distributions, but if yours does, it can save you from being forced to withdraw and pay taxes on excess funds you do not need.

3

Request that the company holding your IRA provide you with the necessary paperwork to make the withdrawal. You can request a check in the mail or provide the company with your banking information to have the funds deposited directly into your bank account.

4

Negotiate with your creditors for lump sum payments of your credit card debt. If you opt to settle for less than the amount that you owe, request that the creditor provide you with a statement of your settlement agreement in writing.

5

Pay your creditors via a check or money order after you have received a signed agreement detailing the terms of the settlement. This protects you in the event that the credit card company later denies any knowledge of the arrangement.

6

Invest any money that you have left over if you took out more money than you needed. See a financial adviser before you invest to create a plan that will give your investment the greatest return. Over time, your money will accrue interest that will help offset the loss of funds that occurred when you paid off your credit card debt.