You probably know that paying off debt is vital to your financial wellbeing. And if you are like most Americans, those words probably landed somewhere on your New Year’s resolutions list. The question now is how to make it happen, and that particular question can be difficult to answer when your budget’s tight and you don’t really have extra cash lying around. So what do you do?

Well, there are a few common ways. You can try to earn more, of course, spend less, and even have some garage sales to help you out. All of those are great ideas, but what about paying off debt with retirement money? Is that a good idea, too?

Should I Pay Off Debt With Retirement Money?

Like most things in life, there’s really no right answer for everyone, but let’s try to answer it as simply as possible: You should only do it under very particular circumstances. If you choose to pay off debt with retirement money without thinking it through, you might find yourself facing consequences that make you wish you had your mountain of debt back. To help you make the best decision for your financial situation, let’s take a look at how this all works. 

How Retirement Accounts Work

Retirement accounts are specifically designed to help you save for retirement in a tax-free way, at least until you cash out. While there are several ways to save for retirement, the following are the three main types. We’re going to keep it simple and talk about those only as they help lay out the pros and cons of paying off debt with retirement money. 

Penalties

Each of these retirement accounts has similarities and differences when it comes to withdrawing money early. Before we jump into those, let’s clarify that the standard age that you can withdraw money from your retirement account without penalty is 59½. Doing so before then means facing the following:

• Withdrawing from a 401(k) early means paying a 10 percent penalty in addition to an automatic 20 percent or more being taken for taxes. That means for every $1,000, you are most likely going to lose a minimum of $300.

• With a traditional or Roth IRA, you still face that 10 percent penalty. The difference is instead of having taxes taken out immediately, you pay them when you file your taxes. Still, you are losing a good chunk of change.

Of course, every rule comes with exceptions. You might forego those penalties if you meet the following:

• You pass on, in which case the money can be cashed out and given to your beneficiaries.

• You become disabled.

• The money is needed to pay for medical expenses. However, the total needed must exceed 10 percent of your income.

• You are military and called out for active duty.

• You are using the money to repay tax debt.

There are some additional exceptions to each type.

401(k) 

• The money is divided due to a divorce.

• You overcontributed during a specified period.

• The money is needed for what is referred to as an immediate and heavy need. These include avoiding eviction or foreclosure, paying for funeral expenses, repairing your home after a natural disaster, or something equally as serious.

• If you work at a federal or state job and leave that job at age 50 or later

• If you work any other type of job and leave it at age 55 or later

IRAs

• The money is intended for qualifying higher education expenses, such as tuition, textbooks, and so on.

• You are unemployed and need it to pay your health insurance premiums.

• You need $10,000 or less to help with purchasing or building your first home.

As you can see, the only qualifying debt here is tax debt. That means that any other debt will earn you a nice penalty. 

Pros and Cons

Hopefully, the previous information has diluted your temptation to cash out your retirement account immediately. Let’s dig in a little deeper now to determine whether you should pay off debt with retirement money by looking at the pros and cons.

Okay, confession. This section is not going to be very long because there is really only one pro: It can get you a large sum of money- depending on how much you have contributed- at once. Having a decent amount of money all at once can help you make big moves quickly. That, my friends, is pretty much where the pros end when it comes to this topic.

Another confession. Pretty much every con falls under the same category: If you pay off debt with retirement money, you cost yourself a lot. First, there are the penalties for early withdrawal, of course. Giving up 30 percent of your money is never a good idea when it can be avoided. I don’t care if you’ve got $300 or $3 million in your account- 30 percent is a huge percentage.

What If I Qualify for Penalty-Free Withdrawals?

Yes, I know. If you fit the requirements above, you may be thinking that you’re good to go. Without the penalties, that 30 percent drops, right? 

Well, the answer is that it does drop down, but it does not go away. You may not have to pay the penalty, but you still get taxed, which means you are still paying out at least 20 percent. And though you still pay taxes on the money when you retire, most people are in a lower tax bracket at this time. That means a lower tax rate than you would likely be paying at this time. 

Let’s not forget what retirement accounts are for. They are intended to help fund your retirement. If you do not have enough saved at retirement, you are either not going to be retiring or not living the life you wanted during retirement. Every time you withdraw from your retirement money, you are defunding your future. 

Do You Need That Money More Now Than You Will In the Future?

I know how desperate you can get when times are tough. It’s normal to want to jump to extreme solutions when facing trouble- it’s human nature: fight or flight. We look for any way we can to ease the burden. 

However, there is one very important thing to keep in mind here. At this moment- while you are still employed or at least employable- you have an opportunity to continue making money. Once you have retired, you can only work with what you have. That’s not to say you cannot do other work or benefit from investments and such. I’m only saying that most people find themselves much more limited in retirement. 

So, in my opinion- along with many experts- it’s best to leave retirement money alone if at all possible. Having said that, please understand that if you are facing something really extreme- like home foreclosure or medical needs for you or a loved one- and have no other way to deal with it, retirement money may be the answer. Having millions put away for retirement means nothing if you are sleeping out of your car or your child needs medical care. 

Other than those extremes, though, it’s best to find another way to deal with debt. Don’t worry, though. There are plenty of ways to do that, and we’re here to help.

Other Approaches to Debt

I already mentioned earning more, spending less, and garage sales above, so I won’t get too deep into those. Do keep them in mind, though. A good home decluttering, a side hustle, and a budget can absolutely work wonders with paying off debt. However, there are a few other ways:

Getting Organized

If you feel like you are drowning in debt with no life vest in view, there is only one place to start: With a plan. A lot of times, desperation comes from a lack of clarity. When you take a minute to really look at that debt, organize it, and come up with an attack plan, you regain some sense of control, and that desperation starts falling away. 

So before doing anything drastic, dig out the debts. Make a list of each with the balances due, the interest rates, and so on. Determine which one to work on first and get started. You can use a debt tracker app to help you organize your debts and even help you come up with a debt payoff plan. This step alone can make you feel much lighter.

Balance Transfer Cards

If you are dealing with credit cards with high-interest rates and even higher balances, you might consider a balance transfer card. Most of them allow you to transfer your balance for a fee and give you an interest-free period. This can be a great option as long as the fee is not greater than the interest rate, and you can pay off the balance before the interest-free period is over.

Installment Loans

Under most circumstances, paying off debt by going into more debt is not a good idea. Occasionally, though, it is. If you can qualify for an installment loan with a lower interest rate and better repayment terms than your current debt, you can end up saving a lot of money. Do be sure to really weigh out your options, though, so you do not get in worse trouble with your money.

Get Help

You can also consider debt management counseling. These services can help you develop a debt payoff plan, provide education to help you stay out of debt, and more. Different ones offer different things, so take a look at a few if you choose to go this route.