If you have debt that is piling up and you have found yourself in a situation where you just simply cannot keep up with your monthly bills, but you also have been wise about saving for retirement, it can be awful tempting to see that retirement fund as a piggy bank that you can use now to pay off your debt and get back on track. DON’T DO IT! Read more to find out why!
Your Retirement Funds are (Almost Certainly) Protected from the Creditors!
In 99% of cases that we file, the retirement accounts (401Ks, IRAs, 403(b)s, etc.) are exempt from collection. That means that when you file a bankruptcy, the funds from those accounts cannot be taken for the benefit of the creditors. Because they are protected, the benefit to filing the bankruptcy is that you get a fresh start AND get to keep the funds that you have saved for your retirement—a much more enticing result than using your retirement to pay the debt, but then having to begin saving for your retirement from scratch! (There are very limited situations where this is not the case, and we would discuss that with you).
Using Your Retirement Funds Can Create Unexpected Tax Issues
If you are not of the age where you can reach into your retirement account without penalties for early distribution, you may be setting yourself up for a big tax bill when tax time rolls around. First, there are tax penalties for withdrawing the funds, and then there are income taxes on the amount withdrawn. This double whammy could lead to four, or five, figure tax bills—which can in turn lead to incurring more of the very debt that you just attempted to eliminate.
What About a 401K Loan?
A 401K loan can be a useful tool at times, but in this day and age of economic uncertainty, there are pitfalls to be found here as well. The number one issue with 401K loans is that if you should lose your job, and default on the loan payment, the loan is then reclassified as a distribution, and can lead to the tax issues discussed above. If that were to happen, then you would not only be dealing with being unemployed, but also facing a potential tax bill—another double whammy!
CALL NOW FOR A FREE STRATEGY SESSION FROM A MN BANKRUPTCY LAWYER AT LIFEBACK LAW FIRM
If you are overwhelmed and thinking about using your retirement funds to pay back debt, please reach out to us to see if there is a better path to gaining financial freedom and getting your life back by going to www.lifebacklaw.com. We look forward to hearing from you and helping you to find the light through the darkness.
