Should I use my retirement savings to pay off debt?


Q. I am 66 and married and I still work. I haven’t started Social Security and hope to wait until age 70. Our annual income is about $150,00 a year. We plan to work another three to five years or until my wife is eligible for Medicare and Social Security. We own a property in New Jersey that’s rented out to a relative and we break even on our monthly costs. We also have a place in Florida which has no mortgage but needs to be updated, and our primary residence is a rental in Jersey City. I have $250,000 in my 401(k) and $30,000 in my Roth IRA and I contribute the minimum. I’m working hard to pay off debt before retirement. I have a $25,000 home equity loan and owe $15,000 in back taxes. Should I take money from the Roth and pay off the debt and then increase my 401(k) to build the savings back? Or should I just slowly pay the debt?
— Unsure

A. There’s a lot to consider here.

No debt sounds great, but there may be consequences.

Indeed, dome decisions that may seem favorable in the short term could turn out to be unfavorable in the long term, said Deva Panambur, a fee-only planner with Sarsi, LLC in West New York.

We would need to know more about your cash flows, tax rate, cost of the debt and risk profile to give you a proper analysis, but here’s what you should consider.

“In general, taking money out from an investment account, whether taxable, tax-deferred or tax-free, because the markets are down, is not recommended because nobody can forecast what will happen to the market, especially in the short term,” Panambur said. “If the market rises after you take money out, the implicit cost could be much higher than the cost of debt you are trying to pay off.”

Further, by taking money out of the Roth account, paying off the debt and later making it up” through contributions to your 401(k), you will have exchanged tax-free funds for tax-deferred funds, which may not be ideal considering your current and future tax rates, he said. If certain conditions are met, money in a Roth account will not incur any taxes for you or your beneficiaries, whereas money in a 401(k) account grows tax-deferred but will be taxed at the relatively higher ordinary income tax rates when it is withdrawn, he said.

“If your 401(k) has an employer match, then contributing at least as much as to receive that match is one of the most favorable options,” he said. “Beyond that you will have to compare the cost of debt with the after tax, risk adjusted rate of return of your investment accounts.”

If paying off your debt turns out to be a better decision then, start by paying off your high-cost debt first, he said. The ideal solution is probably to manage your cash flows to pay off the high-cost debt using your monthly savings.

As for your decision on delaying Social Security, it’s usually a good one, he said, especially if you have a high life expectancy.

“For each year you delay, your benefits increase by 8% and that is for life,” he said. “Social Security payments are indexed to inflation making a larger benefit even more attractive.”

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This story was originally published on July 19, 2022. presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.