How to Pull From an IRA to Pay Credit Cards

When financial times are tight and you have accumulated more debt than you can pay on a monthly basis, it may be attractive to pull money from your IRA to pay down that debt. The process of taking money out of an IRA is simple, but keep in mind that there are significant tax implications depending on your age and how much money you choose to withdraw. Always review this decision with a tax adviser prior to doing it to make sure you are not paying off one debt only to incur a new one to Uncle Sam.

Instructions

1

Add up the total value of debt you want to pay off. Take the balance of all credit cards or other unsecured debt you have and add them up with the calculator. Write this number on the top of your paper with the word "Debt" next to it.

2

Calculate your annual income. You may do this by using a previous year's tax return or by taking your most recent pay stub and multiplying your monthly income by 12. Write this number on the paper with the word "Earned Income" next to it.

3

Add the debt to the earned income. This will determine your new adjusted gross income. While still an estimate, it's a good place to start.

4

Review the IRS Tax Table found at IRS.gov. This will help you determine what your new income bracket will be. You can reach this figure by adding the aggregate value of your debt to your income. For example, if you make $55,000 annually but have $15,000 in debt, you will be moving yourself from the 25% tax bracket to the 28% tax bracket according to 2009 tax rates.

5

Estimate your tax liability. If you are not yet 59 1/2 years old you will pay a 10% tax penalty on the money pulled from the IRA. If you have $15,000 in debt, you will have to pay an estimated $1,500 in penalties. You also must pay 28% on the $15,000. You can choose to pay this $4,200 at tax time or at the time of withdrawal.

6

Fill out the IRA Distribution Form. To simply the accounting, select the boxes to have taxes withheld and send you the net amount of $15,000 for the debt. This will calculate the exact amount of tax and penalty that should be taken to give you the amount you need. Send this to the IRA Custodian who will liquidate the aggregate value including taxes, pay Uncle Sam and send you your check.

7

Prepare to pay additional income taxes. If you have taxes withheld from your paycheck, you may want to increase the amount withheld monthly to make up the difference. If not, start setting aside money you are no longer paying toward debt to cover the increase in your tax rate for the year.