Cash out IRA to get out of debt?
This was a question asked on a recent Dave Ramsey show. I can completely understand why someone might ask this question in the spirit of trying to manage wise and become debt free.
Dave mentions the problem with cashing out an IRA is that you will pay a 10% penalty. On top of the penalty you’ll have to pay taxes equal to your tax bracket. For example, if you’re in the 25% tax bracket you would pay a total of 35% in penalties.
Given that you’re paying penalties and taxes you could equate this to taking out a loan at 35% interest to pay off your car. It doesn’t make much sense when you look at it that way.
Dave tells us not to cash out those retirement accounts to pay off debt. The better approach is to keep your money invested and let it do some work for you earning interest. Rather, build a good debt pay off plan and put the car loan behind you as soon as you can.
