Get free help preparing your taxes from AARP Foundation Tax-Aide. Find a location


You Could Choose Your Dream Vacation

Contests and

AARP’s Superstar
2015 Contest

Sing for a chance to win $5,000! Enter AARP’s Superstar 2015 Contest!
See official rules.

Driver Safety

Piggy bank on the road - AARP Driver Safety

Take the new AARP Smart Driver Course!

AARP Books

Visit the Money Section

Enjoy titles on retirement, Social Security, and becoming debt-free.

Jobs You Might Like

most popular


Pay Down Your Debt Challenge

The One Time You Can Use Retirement Money to Pay Off Debt

Most of the time it's not worth raiding your nest egg, but this loan can be the exception

Pay Down Your Debt Challenge Icon

If you are near retirement or have already retired, you don't want debt hanging over your head. But if you haven't been able to pay off those nagging credit card bills, you may be wondering if you should dip into retirement money to rid yourself of those debts.

See also: Saving vs. Paying debt

In most cases, it's a bad idea to drain your 401(k), IRA or other retirement assets to eliminate credit card obligations. That's because if you're under 59 ½ years of age, you could face a 10 percent tax penalty plus have to pay ordinary income taxes on any amount you withdraw.

Still, there is one time when it probably is a good idea to use retirement money to pay off high-rate credit card debt: It's when you're still working, and can borrow money from an employer-sponsored retirement plan — and then repay the money to yourself without tax consequences.

Let me explain why this could be a good idea and how to go about it.

Assume you owe $20,000 in credit card debt at a 15 percent annual interest rate.

When to take money from your retirement fund and repay a debt- money under lock and key

— Photo by: Perry Mastrovito/Getty Images

For every year you let that debt lingers, you're forking over $3,000 in interest payments alone to a bank. That $3,000 translates into you making the bank $250 richer and yourself $250 poorer every single month.

So you'd be wise to consider tapping your retirement money to pay off those credit card bills.

The question is: how should you go about doing this? Your choices really boil down to two options: You can take a distribution or you can borrow money from the retirement plan.

Don't Take a Distribution, Take a Loan

As mentioned, early withdrawals have serious tax ramifications. So a distribution is not the preferred strategy. Plus, taking money out of your 401(k) permanently means that you lose out on the chance for those funds to grow over time — which is the whole point of stashing away money into your retirement nest egg. You want those funds to appreciate over the years and to be there for you once you stop working.

So again, the borrowing route is more desirable, because it will force you to replace the money you take out.

But if you've already retired, you can't borrow money from an employer-sponsored retirement account, such as a 401(k), 403(b) or 457 plan. So this strategy will only work for people who are still gainfully employed and whose retirement plans at work permit borrowing.

Topic Alerts

You can get weekly email alerts on the topics below. Just click “Follow.”

Manage Alerts


Please wait...

progress bar, please wait

Tell Us WhatYou Think

Please leave your comment below.

The Cheap Life

Jeff Yeager Cheap Life Ultimate Cheapskate AARP YouTube web series save money

Catch the latest episode of The Cheap Life starring Jeff Yeager, AARP's Ultimate Cheapskate. Watch

Discounts & Benefits

From companies that meet the high standards of service and quality set by AARP.

membership benefit financial college aarp

Advice on saving for education from AARP® College Savings Solutions from TIAA-CREF.

AARP Credit card from Chase

Members can get cash back rewards on purchases with the AARP® Credit Card from Chase.

member benefit aarp financial service auto insurance

AARP® Auto Insurance Program from The Hartford offers members no-cost quotes.

Member Benefits

Join or renew today! AARP members receive exclusive member benefits & affect social change.

Advance your skills. Transform your career.

Explore your learning possibilities.