How to Withdraw From Your Retirement Account to Clear a Debt

By: Craig Woodman

A large stash of cash in an IRA account makes it a tempting place to secure funds to pay off debts. In some cases, the money you withdraw or distribute from your IRA may be tax and/or penalty free. If you are over age 59 1/2, Traditional IRA withdrawals are penalty-free, and your Roth IRA withdrawals are tax and penalty free. You can also withdraw contributions that you make to a Roth IRA tax-free regardless of your age.

Step 1

Request a distribution from your IRA trustee for the amount that you need to clear the debt. If your trustee is a bank, and the money is held in a bank deposit account, go into your bank and request the money. If your account is held with a mutual fund company or brokerage firm, a phone call and the trustee's required forms may be required.

Step 2

Send the funds to the creditor that you wish to pay off when you receive your distribution. Deposit the funds into your own checking account, or consider purchasing a money order or having your bank draft a cashier's check payable to the creditor for the exact amount of the debt.

Step 3

Claim the distribution on your income taxes correctly. You will receive a Form 1099-R from the IRA trustee, detailing the amount of the distribution in box 1 and the taxable amount of the distribution in box 2a. Record the total amount of the distribution on line 15a of Form 1040 or line 11a of Form 1040a. The taxable amount is shown on line 15b or 11b, and added to your income.

Step 4

Complete Form 5329 if you will owe a penalty on this distribution as an early withdrawal from an IRA. If you are under age 59 1/2, and the distribution is from a traditional IRA, you will probably owe a 10 percent tax penalty on the distribution amount. If you are taking a distribution of contributions that you made to a Roth IRA, you will not owe a penalty on the distributions.


  • Try to find ways to pay off your debts without using retirement account money. The 10 percent tax penalty is a significant loss, plus the taxes you pay on the money you withdraw. Even if the withdrawal is tax-free with a Roth IRA, you lose the benefit of future tax-free compounding of the money.


  • Be certain to claim the amount of the distribution correctly on your federal income tax return, even if it is tax free. The IRS will compare the distributions reported on the 1099-R forms that it receives with what you claim on your income tax forms.


About the Author

Craig Woodman began writing professionally in 2007. Woodman's articles have been published in "Professional Distributor" magazine and in various online publications. He has written extensively on automotive issues, business, personal finance and recreational vehicles. Woodman is pursuing a Bachelor of Science in finance through online education.

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