Should You Tap Your Roth IRA or Rack Up a Credit Card Balance When You Need Money?

A parent teaches their child about credit cards through buying something online.

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You’re taking a risk, no matter how you look at it.

Key points

  • With a Roth IRA, you can withdraw your principal contributions without penalty.
  • There’s a danger in racking up credit card debt, but depleting your retirement savings can also be dangerous.

You might reach a point where you need to borrow money, and soon. If your car needs a $3,000 repair, for example, and it won’t run without it, then you can’t exactly afford to spend months without a vehicle while you do your best to save up that cash.

Now, you may have different options in that sort of scenario. One is to charge the repair on a credit card and pay off the balance over time. Doing so, however, will mean accruing interest on the balance you carry forward, thereby making it a lot more expensive.

Also, too high a credit card balance could cause damage to your credit score. That’s not something you want either.

But you may not necessarily need to resort to credit card debt to address an immediate need for money. If you have funds in a Roth IRA, that account could serve as a source of emergency cash.

If you take a withdrawal from a traditional IRA prior to age 59 1/2, you’ll risk a 10% penalty for accessing your money early. But the reason that penalty applies is because you get a tax break on the money you put into a traditional IRA.

Roth IRAs work differently. With a Roth IRA, your account is funded with after-tax dollars, so there’s no immediate tax break on your contributions. Because of this, if you need money in a pinch, you can take an early withdrawal from a Roth IRA and avoid that 10% penalty, provided you only touch the principal contribution portion of your account, and not the gains portion.

But while tapping your Roth IRA to access money in an emergency might seem like a better route than racking up credit card debt, there’s a danger to raiding your retirement savings. So in this case, withdrawing from your Roth IRA isn’t necessarily the better call.

You don’t want to leave yourself short

Any time you take money out of a Roth IRA, you’ll leave yourself with less savings for retirement. So while you can access some of your Roth IRA funds penalty free, doing so could mean facing a financial shortfall later in life, when you don’t have the option to keep working to make up for it.

Not only that, but any time you take money out of a Roth IRA, you lose out on the chance to invest it in a tax-free manner. So let’s say you take a $3,000 withdrawal to cover a car repair. Leaving that money invested for several more decades could turn it into $12,000. So all told, you’re losing far more than the original amount you remove.

Meanwhile, if you carry a credit card balance of $3,000 forward for a period of time, you might accrue, say, $600 of interest on it. That’s not a small amount. But taking an early $3,000 Roth IRA withdrawal might cost you $9,000 in gains as per our example. In that case, you’re really not benefiting financially by tapping your retirement account.

A tough call to make

Racking up credit card debt can be dangerous. But so can raiding a retirement plan ahead of schedule.

Your best bet is to build yourself an emergency fund so you have cash reserves to tap when unplanned expenses arise. But in the absence of that, you may actually find that carrying a credit card balance makes more financial sense than raiding your retirement savings.

If you end up going the credit card route, though, do your best to shed your debt as quickly as possible. That could help minimize the amount of interest you rack up, and also, help minimize any potential damage to your credit score.

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