Can I Use My Roth IRA to Pay Off Debt?

If you've been in debt for a while, you may be eager to pay it off so it's not hanging over your head. It’s easy to get tired of loan payments and credit card minimums monopolizing a big chunk of your paychecks. 

If you’re struggling to keep up with those payments, it's to think about all of your potential debt relief options. Maybe you have retirement savings in a Roth IRA and you're wondering: Can I use my Roth IRA to pay off this debt?

The short answer is yes. But whether you should tap your Roth IRA to pay off debt is likely the more important question.

Can You Take Roth IRA Withdrawals to Pay Off Debt?

After you turn 59 and 1/2, you can generally take withdrawals from any type of IRA without a penalty. But the rules are different if you're younger. 

If you take a withdrawal from a traditional IRA before age 59 and 1/2, you usually face a 10% penalty on the amount you take out of your savings. That’s because the IRS gives you a tax break on your contributions, and it wants you to leave that money alone until you’re retirement age.

Roth IRAs work differently, though—with a Roth IRA, there's no penalty for taking early distributions as long as you only touch the principal portion of your account and not the gains. 

The reason? Roth IRAs don't give you a tax break on your contributions like traditional IRAs do. As long as you only withdraw from the principal portion of your Roth IRA (meaning the amount you’ve contributed), you can take a penalty-free withdrawal to pay off your credit cards, loans, or other debts.

Here's an example: Let's say you owe $25,000 between your credit cards and a personal loan balance. Your Roth IRA has a $50,000 balance, $30,000 of which is contributions you made yourself (the principal) and $20,000 of which is gains from your investments. 

In this case, you don't face a penalty if you withdraw $25,000 from your Roth IRA to pay off your debt—the principal portion of your account covers that $25,000.

Should You Take Roth IRA Withdrawals to Pay Off Debt?

Now that you know that you can take Roth IRA withdrawals to pay off debt, the question becomes whether you should. Let’s look at the benefits and drawbacks of using a Roth IRA for debts.

The benefits of using a Roth IRA to pay off debt

One benefit of using a Roth IRA to pay debt is that you may save yourself a lot of money on interest. If you're juggling credit card balances with an average 25% APR, for example, paying it off sooner could spare you from racking up loads of future interest. 

In that case, the interest you accrue on your debt may well outpace the gains you get in your Roth IRA. So you may come out ahead financially by taking a Roth IRA withdrawal to make that debt go away. You can then take the money you're not spending on interest and put it into your retirement savings in future years.

Another benefit of using a Roth IRA to pay off debt is that it can eliminate a huge source of stress. If your debt causes you a lot of anguish and impacts other areas of your life (like your job or relationships), it may be worth taking a Roth IRA withdrawal to pay it off for peace of mind. If you're fairly young, you might have plenty of time to rebuild your savings in time for retirement.

The drawbacks of using a Roth IRA to pay off debt

A clear drawback is that the more you take out of your Roth IRA ahead of retirement, the less money you’re likely to have when you get to retirement. Plus, when you take money out of a Roth IRA, you lose out on the opportunity to invest with it.

Imagine you take a $25,000 Roth IRA withdrawal to pay off debt. Had you left that money in your account, it might have doubled, tripled, or quadrupled by the time you get to retirement. 

Also, taking a Roth IRA withdrawal to pay off debt may not address the root cause of your debt. If you're struggling to stick to a budget, or you're juggling bills your paycheck can't handle, a Roth IRA withdrawal might fix the problem temporarily by paying off your existing debt. But that doesn't necessarily stop you from racking up new debt.

Alternatives to Using Your Roth IRA to Pay Off Debt

Tapping a Roth IRA to pay off debt could cost you money in the form of lost gains, and leave you with a retirement savings shortfall. Before you take a Roth IRA withdrawal to pay off debt, here are some other options to explore.

Adjust your spending

Short-term spending cuts and lifestyle changes could free up a lot of money to pay off debt. Getting a roommate, for example, could make it possible to pay off debt without raiding your Roth IRA.

Get a side hustle or raise

If you can boost your income with a second job, it could be enough to pay off your debt so you don't have to use your Roth IRA. Similarly, asking for a raise or switching to a better-paying position are also options for boosting your income so you can better afford your debts.

Consolidate your debt

Debt consolidation could make your debt easier to manage and less expensive to repay if you can reduce your interest rate. You could consider a personal loan, or, if you're a homeowner, a home equity loan or cash-out refinance.

Negotiate or settle your debt

You might negotiate with your credit card companies or lenders to lower the interest rate on your debt or waive certain fees to make it easier to repay. You may also negotiate a settlement with your creditors to get rid of your debt for less than you owe.  You can negotiate for debt settlement on your own, but it may make sense to work with a debt relief company to negotiate on your behalf.

The Bottom Line

While you can use a Roth IRA to pay off debt, it could hurt you financially in other ways. Before you tap your Roth IRA to pay off debt, consider the drawbacks, and explore alternatives that may make more sense for you.