If you’ve been a faithful contributor to your IRA or 401(k) while at the same time building up considerable debt, it may be tempting to dip into those retirement savings and wipe out the debt payments once and for all. If you’re looking at purchasing your Atlanta new home under today’s stricter mortgage guidelines, you may even be considering using retirement funds to increase your down payment and/or lower your monthly debt payments to free up cash for a monthly mortgage payment instead.
According to Roger Wohlner, financial expert at the
Equifax Personal Finance Blog, you need to think long and hard about this before you take that step. His recent post, “
Should You Use Retirement Savings to Pay Off Debt?” warns of the large tax penalties you could incur if you dip into tax-deferred retirement savings accounts.
Wohlner explains that if you take the money out of your retirement account, you’ll pay taxes on it according to your tax bracket, so $10,000 will cost you an extra $2,500 if you’re in the 25 percent income tax bracket. Plus, if you’re younger than 59 ½, you may pay a 10 percent penalty as well.
On the other hand, you’ll get tax benefits for your mortgage interest. If you’re planning to use retirement funds to lower your mortgage, Wohlner says you’ll need to calculate both the tax costs and lost deductions. Since credit card debt generally carries a high interest rate and sees no tax benefits, it may make more sense to pay down your cards using your retirement savings. But still, you’ll need to be very careful. Even if it pays in the short term, you’ll lose ground on your retirement savings and the benefits of compounded interest.
What’s your best course of action? There’s no easy answer to paying off debt while saving for retirement. Check out the
Equifax Personal Finance Blog for Wohlner’s complete tips and links to more retirement planning articles.