Whether you are withdrawing early or during retirement, you’ll pay income tax on the full withdrawal.
You end up with just 65% of the withdrawal; a terrible price to pay to try and pay off some debt.
The following examples assume you don’t qualify for any of the random exemptions.
Example 1: ,000 Over 20 Years If you withdrew ,000 as in our above example that could have been invested for 20 years before retirement, you’re missing out on a lot of growth.
Over 20 years at 7% that ,000 would have grown to about ,700. Example 2: ,000 Over 10 Years Likewise if you withdrew an even larger amount at ,000 and only had 10 years until retirement, the pain is still significant. Paying early withdrawal penalties of 10% just doesn’t make sense.
,000 invested at 7% for 10 years would grow to about ,690. Paying income tax, especially on Roth accounts, just doesn’t make sense. The risk of raiding your retirement to pay off your debt is it doesn’t fix the underlying problem.
The reason you have debt is you spent more than you earned.