If you are looking for a source of funds to pay expenses, you may be tempted to cash out your individual retirement arrangement (IRA), to obtain funds quickly. Your IRA plan guidelines may permit early withdrawal of funds at any time, even if you have not yet reached retirement age. This strategy can offer advantages and pose disadvantages.
Payment of Emergency Expenses
Cashing out an IRA can allow you to pay for emergency expenses if you do not have other financial resources available to meet your financial need. For example, using IRA funds can allow you to pay off debt to avoid interest and debt collection costs, help you catch up your mortgage to prevent foreclosure or handle unforeseen medical expenses. This strategy can also help you pay for tuition and education expenses for you, your spouse or your child.
By providing funds for you to pay for expenses, cashing out an IRA can help you avoid reliance on credit cards or lines of credit to meet your financial obligations. Because your credit score is partially based on the amount of debt you owe, opting for an IRA distribution may help preserve your credit score if your debt payments are current. Avoiding debt can also save you interest you would pay if you used a line of credit or a credit card to pay for your expenses.
In most cases, if you cash out an IRA account before you reach age 59 1/2, you will have to pay penalties on the distribution you receive. Early distributions on traditional IRAs are subject to a 10-percent penalty unless you withdraw the funds for a specific reason, such as permanent disability or medical insurance expenses incurred during prolonged unemployment. Earnings on a Roth IRA are also typically subject to a 10-percent tax penalty; however, contributions that have remained in your Roth IRA account for four years may be exempt from this penalty.
Loss of Potential Retirement Income
Cashing out an IRA will prevent the money you received from earning interest to apply toward your retirement savings. It will reduce the amount of money you have available to meet your retirement expenses, which can delay retirement and keep you working longer than you anticipated.