Clark Howard

Should I Withdraw from My Roth IRA or Use My Savings To Pay Off Credit Card Debt?

Americans now hold a record $1.13 trillion in credit card debt. Probably more considering that was the number at the end of 2023. And that average credit card interest rates sit much higher than 20%.

It’s a domino effect. When the COVID-19 pandemic began, Americans suddenly became great savers. But in the last two years, people have spent all the savings they accrued. And then kept going, even as it has meant turning to credit cards.

If you’re among that group, don’t fret. But do make a plan of action. If you’re lucky enough to have some dollars you can throw at your credit card debt, here’s how you should approach things.

Should I Pay My Credit Card Debt With Roth IRA or Savings Account Dollars?

Should I pull from my Roth IRA or use my emergency fund to pay off my credit card debt?

That’s what a Clark Howard listener recently asked.

Asked Michele in New Jersey: "I am wondering if you think it's a bad idea to take money out of my Roth IRA to pay down $10,000 in credit card debt? The interest rate is over 18%.

"I have other savings that I can use earning about 4% now but I am worried about using that because it's all I have right now in liquid savings. Sad I know at my age. I am 62 years old."

Clark’s first instinct? Telling Michele to stop beating herself up. A lot of people don’t have a penny saved in a retirement account, Clark told her. So give yourself credit for having a Roth IRA at all.

“Don’t pull money from your Roth. Your Roth is growing tax-free,” Clark says. “The money you have in savings is being taxed, the earnings. So I know that’s your liquid savings. Use it to pay down the balance on the credit cards. Even though it creates a risk for you.

“Every month moving forward, the money you would’ve paid toward the credit cards, put it into building your savings back up with now no credit card debt.”

What To Do If You Drain Your Emergency Fund and Then Face an Unexpected Expense

Let’s say you drain your liquid savings to get rid of your credit card debt.

And a month later, you run into a financial emergency of sorts. Something breaks in your house.

At that point, you can withdraw your contributions from your Roth IRA, Clark says. And as long as you’re not pulling out investment gains, you won’t incur a tax penalty. (And Michele can even pull out earnings penalty-free because of her age, assuming her account is at least five years old.)

Try to avoid pulling from your Roth IRA at all.

“But that would be your backup plan until you rebuild your savings,” Clark says.

“And be happy that you have those two things. You have the Roth. You have your savings. We’re not talking about ‘I have this credit card debt, I’m in my 60s and I don’t have a penny to my name.’ That’s not what you said.

“This is just what’s the best tactic to use to get rid of that ugly, high-interest credit card debt. And of course, it goes without saying, you can’t use credit cards going forward. You haven’t accomplished anything if you pay off the credit cards and then use them again.”

Final Thoughts

Facing credit card debt? If you’ve got a Roth IRA and a savings account, use your savings first. Interest on savings are taxable and earnings inside a Roth IRA are not.

Plus, if you run into trouble while you’re at a low point with your savings, you can still turn to your Roth IRA as a last resort.

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