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Using retirement savings to pay credit card debt a bad idea

When an individual switches jobs, an option becomes available to either cash out his or her accrued retirement savings or else roll it over into an IRA or equivalent package.  In South Carolina, as elsewhere around the nation, however, more and more people are choosing to cash out these potentially lucrative packages in the interest of paying down debt, especially credit card debt. However, some experts are cautioning against such a move, since the cost can outweigh the benefits.

A recent study suggests that people who earn less overall, as well as people carrying high debt costs, are more likely to make the decision to cash out a retirement package. However, it is important for those individuals to weigh the benefits. For one thing, cashing out usually comes with a penalty fee of around 10 percent, not to mention the fact that the amount is also taxed as income by the government. 

Compare this to the possible benefits of maintaining that retirement account as an IRA or equivalent. Over the course of a 20-year period, the amount of interest accrued on such an account could well outweigh the possible savings of using that money today to pay down credit card debt. Considering the wide variety of options available to deal with existing debt, it may be best to let nest eggs stay where they are. 

Credit card debt can put a lot of stress on many Americans, as most South Carolina residents already know. But it may be best to resist the urge to possibly hamstring future financial stability to deal with that debt today. Other options, including debt consolidation and bankruptcy, should be considered first, if the debt load is unmanageable.

Source: The Washington Post, "Why you shouldn't use retirement savings to pay off debt", Jonnelle Marte, Nov. 4, 2014

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