Pay Off All my Debt With My Retirement Money?

Dear Liz, My wife and I no longer work. She is 57 and I am 55. We have retirement income of about $90,000 in military and Department of Defense pensions. We have several Roth IRAs and some mutual funds. I have a 403(b) with $75,000. Is it wise to tap retirement accounts to clear off a credit card and pay my car off early to get out of debt? I owe $17,000 on it at 4.2% interest. -- Jeff

Dear Jeff, It rarely makes sense to prematurely tap a retirement account to pay off debt. It usually is much better to use savings or cash in nonretirement assets.

Withdrawals from your 403(b) retirement plan would trigger income taxes that would eat up at least a quarter of what you pulled out. While you wouldn't be subject to the 10% federal penalty because you are 55 and separated from your employer, you'd still wind up paying income taxes equal to your federal and state tax brackets. If you were in the 25% federal bracket, for example, a $20,000 withdrawal would trigger at least $5,000 in income tax (plus whatever your state charges).

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Damian Sylvia

Retirement Income Solutions