Your current finances versus your future finances: this is the argument at one of the most critical mistakes people in serious debt can make. If you have been contributing to a retirement account, you may see it as a great source of income to pay for emergency medical expenses, credit card bills or other forms of debt. But should you?
Most financial experts will say "No!" ‒ but of course, the answer depends on you, your current situation, and how comfortable you are with the decision.
If you are struggling with debt and have a retirement account, you can talk to a bankruptcy attorney about your options. Simply fill out our online form to schedule a free, no-obligation bankruptcy case evaluation.
Retirement Accounts Grow Exponentially. Taking a few thousand dollars out of your retirement savings in order to eliminate your credit card debt may seem like an easy decision, but it can have a lasting impact. Depending on how close you are to retirement, that few thousand dollars could multiply to 5 or even 6 digits or retirement nest-egg.
Retirement Accounts are Protected in Bankruptcy. Almost always, qualified retirement savings accounts will be protected if you end up filing bankruptcy. The exceptions are if you have a 401K valued at more than $1 million, or if your retirement funds exist in a regular bank account.
Creditors Cannot Touch Retirement Accounts. Typically, your creditors have no legal right to the funds in your retirement savings account—unless you hand it over to them. Most retirement accounts cannot be seized or garnished. If you move these funds into a regular savings account, though, they become fair game.
Withdrawal May Mean Taxes and Fees. Depending on what time of retirement account you have, how long you have had it, and how close to retirement you are, withdrawing money from retirement savings may bring taxes, fees and other penalties. This means that, even if you only need a portion of your savings to settle your debts, you'll see an even larger chunk of your account taken out.
Payment Plans Don't Always Work. If you do manage to withdraw enough money from your retirement savings to settle your debts, that may not be the end of your creditors. In many situations, creditors attempt to collect on debts that have already been paid—this is especially the case when debts have been bought and sold by various collection agencies. Some people can only find relief in the legal protections brought on by the bankruptcy courts.
You May Be Left with Nothing. Depending on how close to retirement you are, taking money out of your retirement account can have serious effects on your future lifestyle. If you use all of your savings and only put a dent in your debt, you may end up filing bankruptcy down the line, and have no nest-egg for retirement.
Don't Break Your Good Financial Habits. If you're deep in debt and already have a decent retirement nest egg, consider yourself lucky—saving for retirement is a good financial habit. If you take away that habit, you may find it difficult to build new ones, even if you do pay off any debt that you currently have.