An Early Withdrawal From an IRA to Pay Off Credit Card Debt

Taking an early distribution from an IRA to pay off a credit card is more costly than most people initially realize. If credit card payments are made regularly and the balance is continually declining, then an early withdrawal really should not be taken. However, the concentrated effort should be toward paying off that balance through reduced spending. This can include not contributing toward the IRA for a period of time.

Early Withdrawal Penalties

An early withdrawal from an IRA, traditional or Roth, is subject to penalties imposed by the Internal Revenue Service. A traditional IRA is subject to taxation at the current rate based on a person's level of income, plus a 10 percent penalty. If the person is taking an early distribution from a Roth IRA, then it is not taxable as income but may still incur the 10 percent penalty.

True Costs of Early Withdrawal

When you take an early distribution from an IRA, you also lose any capital gains or divident payments that would have been made on the investment. The length of time that it takes to repay the amount determines how much is actually lost. For example, if a stock pays an annual dividend of $3 per share and paying off the debt requires selling 1,000 shares, that person is losing $3,000 per year in income. If it takes four years to repay it, that's an extra $12,000.

Managing Credit Card Debt

Credit card debt, when not managed properly, may be subject to very high interest rates. If substantial payments cannot be made toward paying it off, then the amount may be steadily growing rather than declining. It is necessary to make substantial contributions to pay off any amounts for which this has become the problem.

Withdrawing to Pay Off Credit Card

If the credit card balance is growing from month to month, because only minimum payments can be made, then something will need to be done to manage it.

A person must weigh the cost of an early distribution against the cost of making continuous and steady payments on a credit card. The best course of action is probably to forgo any payments into an IRA and instead contribute that money toward paying off the credit card. Early withdrawal should really be a last resort.