Should You Raid Your IRA to Repay Debt? Here's What Dave Ramsey Thinks
- Dave Ramsey believes you should try to aggressively work toward becoming debt free.
- He does not, however, advise taking money out of an IRA to repay your debt.
- There are penalties and other consequences that make withdrawing money from an IRA a bad idea.
You may be surprised at the answer to this question from the anti-debt finance guru.
Finance guru Dave Ramsey is perhaps best known for his aversion to debt. He advises his readers and listeners to steer clear of borrowing in virtually all circumstances, and suggests making debt repayment a top financial priority.
While Ramsey recommends making many sacrifices, including eating beans and rice, while on the path toward debt freedom, there are some financial moves he doesn't think you should make in an effort to say goodbye to your debt. Raiding an IRA to repay debt is one of them.
Ramsey doesn't believe you should take money from an IRA for debt payoff
If you have high-interest debt such as credit card debt, it may be tempting to try to access any money you have to get your balance paid down and stop sending money to creditors each month.
That's especially true if you have a lot of money in an IRA or other type of retirement account. It may seem like the money is just sitting there when you won't need it for decades, even as you pay a high rate of interest on your cards.
The reality, however, is that you could really end up regretting taking money out of your retirement accounts -- which is why Ramsey's blog refers to raiding these accounts for debt repayment as a "terrible idea."
In fact, the only time that Ramsey believes it's advisable to take retirement funds out early is to avoid bankruptcy or foreclosure.
Why is using IRA funds for debt repayment a bad plan?
So, why shouldn't you use money you've invested for retirement to try to get free of your creditors today? Ramsey points out several reasons why this is such a bad idea.
First and foremost, if you take money out before age 59 1/2, you are likely to incur a 10% tax penalty unless you fall within a limited exception that allows for early withdrawals. And as Ramsey explains on his blog, you'll also face federal and state taxes at your ordinary rate on the money withdrawn. With all of these taxes, you'll end up with a lot less money than you took out to pay your debt when all is said and done.
Second, Ramsey suggests that even if you are allowed to take money out without penalty -- perhaps because you fall within one of the exceptions -- that's not necessarily a good idea, because it will make it harder to prepare for retirement. "Don’t rob your future self just because it’s easy right now," Ramsey warns.
Ramsey shows on his blog that an early withdrawal results in a loss of all of the money that your invested funds would have made over time. The initial investment you make can grow substantially due to compound interest, with a $50,000 IRA contribution potentially growing into more than $544,000 over 20 years. You'd lose out on those gains if you took out money to pay debt now.
Ramsey is absolutely right about all of these downsides of using IRA money for debt repayment, and you should likely listen to the finance expert and leave your retirement funds alone.
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