Should You Raid Retirement Savings to Pay Off Debt?

The Medicare trap: A large withdrawal can bump up your adjusted gross income enough to trigger IRMAA — the income-related surcharges on Medicare Part B and Part D premiums — costing you hundreds or even thousands of dollars more a year in health care costs. 

IRMAA, or income-related monthly adjustment amount, can be an unwelcome surprise because it’s based on income reported to the IRS two years before. So a large 401(k) withdrawal in 2026 could result in higher Medicare premiums in 2028, regardless of your income at that time.

The debt-recurrence risk: Some people fall deep into debt because of a major emergency expense they can cover only with a credit card. For others, however, chronic overspending is the culprit. In that case, says Bernadette Joy, CEO of financial media company Crush Your Money Goals, “using your retirement savings doesn’t solve the problem. It funds the habit.”  

Unless you address the patterns that created the debt, you’re at risk of just rebuilding those big balances — and you’ve taken a chunk out of your nest egg for nothing.

When dipping into a 401(k) might make sense

While withdrawing retirement funds outright to pay down debt is almost always considered a bad move, financial pros say an alternative strategy can work in the right circumstances: a 401(k) loan.

Borrowing from a 401(k) is fundamentally different from taking a distribution. Rather than permanently shortchanging your savings, you’re lending yourself money and paying it back — with interest — into your own account. There’s no tax penalty, no credit check and the interest goes to you, not a bank, says Russell.

Suppose you’re carrying $20,000 in credit card debt at 21 percent interest. Making minimum payments of around $400 a month, it would take more than 10 years to pay off, and you’d hand an eye-popping $29,000 in interest to the credit card company.

Now consider a 401(k) loan: IRS rules let you borrow up to 50 percent of your vested balance or $50,000, whichever is less. The interest rate is typically the prime rate (6.75 percent as of December 2025) plus a point or two.  

If you borrow that $20,000 at 7.75 percent over five years, the maximum repayment period the IRS allows, your monthly payment will still be around $400 a month but you’ll pay only about $4,200 in interest — all of it going back into your retirement account.

“If credit card interest is snowballing faster than your investments can reasonably grow, a 401(k) loan can offer a structured way to reset,” says Andy Wang, a managing partner at New Jersey–based Runnymede Capital Management. But he cautions that a 401(k) loan “is very different from tapping an IRA, which for those under 59½ usually means taxes and penalties.”

What else to know about 401(k) loans

You must still be employed. 401(k) loans are generally available only through employer-sponsored plans while you’re working for that employer. Retirees can’t use this strategy, and you cannot borrow from an IRA.

Job loss is a risk. Loan and interest payments are deducted from your paycheck. If you lose or leave that job, the outstanding balance generally comes due. If you don’t repay it, the IRS treats the balance as a taxable distribution, with potential penalties.

That’s why a 401(k) loan only makes sense for workers who “have a pretty decent horizon before they plan to retire, or access to cash somewhere else to pay the loan back if they separate from the company,” says Lilias Folkes John, a personal finance coach and author of Your Financial Style Guide.  

The shorter the repayment period, the better. The IRS allows up to five years, but three years or less is safer — especially if you don’t expect to be in your current job for the long haul — and means less total interest.

For example, paying back that $20,000, 7.75 percent loan in three years rather than five reduces your overall interest payments to about $2,500. Of course, the regular payments are higher — about $624 a month — but no longer having credit card payments can make that more manageable.

Don’t stop contributing. While your repayments go back into your 401(k), they simply fill the hole left by your loan. To keep your retirement saving plan on track, keep up your contributions — at least enough to trigger an employer match, if your company offers one. That’s free money you don’t want to leave behind.

Know the alternatives. Not all 401(k) plans allow loans. If borrowing from your account isn’t available or practical, explore other options for digging out of credit card debt, such as transferring your balance to a new card with a low- or no-interest introductory rate; taking out a debt consolidation loan; or working with a nonprofit credit-counseling agency (the National Foundation for Credit Counseling has tools to get you started).

The right strategy depends on your situation, but doing nothing is the most expensive option of all. I know from experience: Earlier in my career, I found myself $100,000 in credit card debt. I paid off every dime I owed in three years, and that experience is the reason I became a financial coach and educator.

Debt at any age is not a moral failing; it’s a problem with solutions. A 401(k) loan can be one of them if you’re employed and can keep contributing to your nest egg — and if you address the root causes of the debt.

“If eliminating the debt is accompanied by sustainable behavior change, a loan can serve as a structured reset rather than a repeat cycle,” says Marsha Barnes, founder of the Finance Bar, a financial therapy company.