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Jeff Fleming
Should I Pay Off a Debt with My Retirement Savings?
Question:
Would it be wise to pay down a large debt with retirement savings plan money and to start over again? This debt is like a weight on my head.
Answer:
Emotions can often get the better of us in financial planning. Are you really willing to do something that does not make economic sense if the weight on your head is lifted? It sounds like you probably are.
Case in point: Let's say your loan interest rate is 8 percent and your retirement plans are earning an average of 10 percent per year. You could actually lose money if you withdraw your investments to pay off the debt. Not only are you losing later use of the money you withdraw to pay off the loan, but you are also losing all of the growth of these lost investment holdings. Over time, this could be a substantial amount.
It is imperative that you understand the additional negative ramifications of using retirement plan assets to pay off your debt. If you are less than age 59 1/2 and you make a withdrawal from a qualified plan or IRA, your withdrawals will be subject to a 10 percent penalty. How heavy is the weight that you are feeling? Is it worth these substantial costs?
Avoid the Penalties
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