A Hefty Tax Mistake

Jay's plan for his IRA is about to cost him more than he knows.

QUESTION: Jay is thinking of cashing in an IRA to pay off his $30,000 in debt. Then he would pay himself an emergency fund payment each month, and in three years he says it would be a wash. Dave thinks Jay is missing some important tax information here.

ANSWER: If you take your IRA money out early, they are going to charge you a 10% penalty plus your tax rate, and you’re going to get hit for about 35 cents on the dollar.

That’s not worth it. I’m not going to give the government that much money to pay off my house early. There’s no way that your equation breaks even in three years because you are losing out on the fact that they money is no longer invested. You lost all of that income on top of the tax hit. There is no way I’m doing this.