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10 Reasons Why People Cash Out IRAs Early


9
To Pay Off Debt
Paramedics load Harvey Lesser into an ambulance after eviction from his apartment for not paying rent; Lesser said he took 25 painkillers the night before.  Since his layoff, he’d used up his savings, including retirement funds, for living expenses. John Moore/Getty Images
Paramedics load Harvey Lesser into an ambulance after eviction from his apartment for not paying rent; Lesser said he took 25 painkillers the night before. Since his layoff, he’d used up his savings, including retirement funds, for living expenses. John Moore/Getty Images

For people with substantial amounts of expensive debt — such as large balances on high-interest credit cards — that pile of IRA cash might look like an attractive way to quickly pay off debt. But if you are younger than 59 ½, personal finance experts say don't do it because of those serious downsides we just discussed.

Of course, there are significant costs to carrying a large amount of credit card debt. In January 2013, the average interest rate on all credit cards was 14.96 percent [source: Dilworth]. Will your IRA grow faster than 14.96 percent this year? Probably not, but remember the penalties. Between taxes and early withdrawal penalties, you could lose 33 percent or more from your IRA just from cashing in early [source: Updegrave].

A more measured approach is to cut back on your IRA contributions and use that money to pay down credit card debt [source: Orman]. That way you can get rid of your debt sooner without cracking open that precious retirement nest egg.