When raiding your retirement to pay off debt might be a good idea
Ask a baby boomer or Gen X-er what type of debt they’re grappling with, and most will tell you it’s credit cards.
One way out: Tap a retirement account to pay it down. The move comes with a lot of caveats, but it can solve a gut-wrenching financial worry and clean the slate, especially if you’re nearing retirement or already retired.
Credit card balances have soared higher in 2025, according to the New York Fed. The average revolving credit card balance for Generation X is $9,600, and for baby boomers, it’s $6,795, according to Experian data.
With the oldest Gen X-ers hitting 60 this year, retirement looms. No one wants to be grappling with the stress of escalating high-interest debt when their paychecks grind to a halt.
“Americans have an absolute mountain of credit card debt,” said Matt Schulz, chief consumer finance analyst at LendingTree. “And even with Fed rate cuts, credit cardholders should expect rates to stay high for the foreseeable future.”
Read more: The best ways to pay off credit card debt
The pros and cons of raiding a retirement account
If you have money stashed away in a retirement savings account, should you use it to stop the bleeding?
We’re constantly told by financial advisors not to touch our retirement accounts until we absolutely must, presumably when the IRS says it’s time to start required minimum distributions from IRAs, 401(k)s, and 403(b) plans at age 73.
Learn more: What is the retirement age for 401(k), IRA, and Social Security withdrawals?
A disparaging eye is often cast on those who borrow from their 401(k)s or outright withdraw funds. But the truth is, it can make sense when you’re up against crippling interest rates on your revolving debt. If you’re retired and living on a fixed income, it can be particularly challenging to both pay down a credit card and make ends meet.
I talked to several experts about whether it’s a good idea to pull money from retirement accounts to pay down high-interest credit card debt. Here’s what they told me.
Pay off one-time debt balances
“If using the credit card was a one-time event for an emergency, it can be advantageous to use assets in a retirement plan to pay down a high-interest credit card debt,” Tricia Rosen, a financial planner and founder of Access Financial Planning, told Yahoo Finance.
In that case, consider alternatives to boost your income for your retirement years, Rosen said. “You might retire later than you originally planned, work part time during retirement, reduce discretionary expenses to make up the difference in retirement.”
Tyson Sprick, a certified financial planner with Caliber Wealth Management in Overland Park, Kan., agreed.
Paying down high-interest credit card debt could be a valid reason to draw from retirement accounts “especially if paying it off in under a year otherwise wouldn’t be feasible,” Sprick said. “Meanwhile, the monthly payments you were making towards slowly paying down the credit card could be redirected back to your investment account.”
Stephanie McCullough, founder and chief executive of Berwyn, Pa.-based Sofia Financial, said a client of hers recently took a withdrawal from a retirement plan to pay off some credit card debt.
“I told her to have a clear idea of where this credit card balance you’re carrying came from in the first place,” McCullough said. “The danger is that you take money from your retirement plan, pay off your debt, and then it just creeps right back up — and before you know it, you’re carrying a balance again.
“It can take a bit of soul searching to acknowledge your own spending habits and perhaps realize that something needs to change.”
Your age can help you decide
Aside from eating into your retirement savings, when you make a straight withdrawal from your tax-deferred retirement account, you will pay income tax on any previously untaxed money and an additional 10% tax if you are not at least 59 1/2. There are a few exceptions to the tax penalty including certain medical expenses, qualified tuition payments, and up to $10,000 for first-time homebuyers.
“I don’t like debt in retirement,” said Cary Carbonaro, a certified financial planner and author. “If you don’t have to pay the penalty to withdraw — as long as you still can finance your retirement and not hurt yourself long term — pay it down. If you are younger, you might want to pay it back with a 401(k) loan.”
Read more: What is the average retirement savings by age?
Loan vs. withdrawal
Taking a loan from your retirement account can be a really good strategy because the interest rate is much less than the double digits you pay on your credit card, Craig Copeland, director of wealth benefits research at EBRI, told Yahoo Finance.
With a loan, it’s not a total loss. You withdraw money from your retirement savings and pay it back to yourself, typically within five years, along with interest. The loan payments and interest go straight back into your account. Depending on what your employer’s plan allows, you can take out as much as 50% of your savings, up to a maximum of $50,000, within a 12-month period.
Be forewarned: If you leave your current employer, you might have to repay your loan in full immediately. When you can’t repay the loan, it’s considered defaulted, and you’ll be on the hook for both taxes and a 10% penalty if you’re under 59 1/2.
Understand the rules of retirement account loans
Plan loans come with a range of fees and restrictions. There’s typically a one-time fee charged for initiating a loan of anywhere from $50 to $100. An annual fee of roughly $25 to $50 is common and then the interest you pay is usually the current prime rate plus 1% to 2%.
The interest is repaid to your own account so that’s not so onerous since you are paying interest to yourself.
Tackle the underlying problem
Getting out of debt feels good. It’s liberating. It’s a fresh start, and you can put all that angst in the rearview mirror. That said, if you can’t get on track to pay your balances in full each month, it’s going to come right back to haunt you again. You have to ask yourself and be honest: How did the credit card debt get to be high enough that you couldn’t pay it down?
Kerry Hannon is a Senior Columnist at Yahoo Finance. She is a career and retirement strategist and the author of 14 books, including the forthcoming “Retirement Bites: A Gen X Guide to Securing Your Financial Future,” “In Control at 50+: How to Succeed in the New World of Work,” and “Never Too Old to Get Rich.” Follow her on Bluesky.
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