Key Takeaways
One-third of Americans with significant unsecured debt pulled money out of their retirement accounts for debt payments, per a 2026 Freedom Debt Relief survey.
The move costs you in two ways: Early withdrawal fees and missed investment gains that can decrease the size of your nest egg when you retire.
Advisors say withdrawing from a retirement account should be a last resort. Instead, try cutting spending, reducing your contributions (but still save enough to get the employer match) or refinancing your debts.
When you’re carrying significant debt, paying it down can monopolize your financial plan. But that doesn’t mean it should automatically come at the expense of other financial goals, like securing a comfortable retirement.
Yet that’s the reality for many Americans. One-third of respondents to a recent survey from Freedom Debt Relief and Money.com say they have pulled money from a retirement account to pay down debt in the last year. That’s roughly the same amount of people who have used a budget app to try to reduce their debt, and more than the 25% who have enrolled in a debt management plan offered by a credit counseling agency. In fact, withdrawing from retirement accounts like 401(k)s and individual retirement plans (IRAs) was among the most common debt reduction strategies named by the 1,800 survey respondents, who all had at least $10,000 in unsecured debt.
Paying off debt can provide some instant gratification. And for some, withdrawing from your retirement fund may truly be the best financial option. But the survey suggests that many people may be putting their long-term financial security at risk before considering other options.
The key is “finding the right balance between successful borrowing and prudent investing,” says David Demming Sr., a financial advisor and president of Demming Financial Services. “You need to find a happy medium.”
The risk of withdrawing from retirement savings to pay off debt
Marisa Bradbury, a financial advisor and managing director at Sigma Investment Counselors, says she would caution anyone about pulling money out of a retirement account to pay off debt.
“You may be getting rid of the debt today, but you’re giving up years of potential growth on that money,” Bradbury says.
That’s because the money you stash in your retirement savings accounts today is being invested into assets like stocks and bonds that are expected to grow significantly. And while you may think you can limit the harm by strategically timing your withdrawals, that’s exceptionally hard to do. Missing just 10 of the S&P 500 index’s best days between 2006 and 2025 would have cut the returns on a $10,000 investment by more than half, according to a report from J.P. Morgan Asset Management’s. Someone who kept their money fully invested would watch their balance grow to $80,619 at the end of those two decades, while someone who missed the market’s 10 best days would only have a $35,866 balance.
You’ll also face income taxes and a 10% penalty when you withdraw money before age 59 ½ from retirement accounts, depending on the type of account. Between the immediate costs in taxes and fees, plus the long-term costs in missing out on compounding growth on your investments, retirement account withdrawals end up being a very expensive way to pay off debt.
“The biggest concern is paying off the debt with retirement money and then ending up right back in debt because the underlying spending issue never changed,” Bradbury says.
What to do instead of withdrawing from retirement accounts
If you’re considering withdrawing from a 401(k) or IRA, Bradbury recommends first doing an honest assessment of whether you can cut your spending any more than you already have. This is where a budgeting app may come in handy, but you can also review your most recent bank statements to see where your money goes each month. Cutting or downgrading at least one subscription service, committing to only dining out once or twice or per month and negotiating with service providers can help.
Another option is to reduce your 401(k) contributions temporarily and redirect that money to debt bills. But make sure you’re not missing out on free money if your company offers a matching contribution, Demming says. Even if someone has $10,000 in unsecured debt, he would recommend they contribute enough to get the full employer match in their 401(k), then focus on paying down the credit card debt.
You can also try to refinance the debt at a lower rate, Bradbury says. One way to do this is with a zero-interest balance transfer credit card, which allows you to put all your money toward paying down principle. Just be sure to see how long the credit card comes with no interest; it’s typically less than 18 months.
Another option is consolidating your debt with a personal loan, which can combine multiple debts into a single monthly payment with a clear repayment timeline. If you qualify for more favorable terms, consolidation may also help reduce borrowing costs or make monthly payments more manageable. Be sure to carefully review the interest rate, APR, repayment term and any applicable fees when comparing options.
If you’re considering pulling from your 401(k) because you’re struggling to make your minimum payments — or you’ve already fallen behind — you may want to consider credit counseling or debt settlement. With the first, a counselor will help you make a budget and payment plan that typically includes a reduced interest rate. With debt settlement, you’ll work with a company that can negotiate with creditors to resolve eligible debts for less than the full amount owed. With either option, it’s important to fully understand the terms of your agreement, how long the process will take and any potential downsides.
There are some situations in which withdrawing money from retirement savings can make sense, like if someone is in a true financial emergency with no viable alternatives, Bradbury says.
“Sometimes it’s the least bad option, but I’d recommend exhausting the other choices first,” she adds.
And if you do end up deciding that a retirement account withdrawal is your “least bad option,” you can limit the harm by simultaneously creating an action plan to try to catch back up on your long-term savings. For instance, once you pay off your debt, you can commit to increasing your retirement account contributions.