Top 5 Reasons You Should Not Withdraw Money From Your retirement Account To Pay Off Debt

Many people think that they can bail themselves out of trouble by getting out of a short-term crisis and borrowing from their retirement account, or cashing it in. Many times, this is the wrong solution.
1. Retirement accounts are protected from creditors, regardless of whether you file bankruptcy. As long as the funds are in the retirement account, the bankruptcy will not affect the funds, and you can keep the money in those accounts. State and Federal laws, called exemption laws, protect these funds so that you can use the funds to live on in retirement. However once you remove the funds from your retirement account, these funds are no longer protected from creditors (companies you owe money to).

2. There are large tax consequences to withdrawing funds from a retirement account. Any retirement funds are taxed as they would have been before, plus penalties for withdrawing the funds early.

3. Once you withdraw the funds, you are tapping into your major source of money in retirement. You cannot count on living just on Social Security payments. We all know that the government is running short on money and may increase the retirement age. Payments may be decreased also. It is hard to save for retirement when you are young, and even harder when you are older, because you have fewer years to accumulate the money you will need to retire. In other words, the funds are “irreplaceable”.

4. Even if you get through this one crisis, most likely, there will be another crisis, and you may fall short again. You’ve already used up the protected retirement funds, and now where will you turn? If you are out of money, you may look again at filing bankruptcy, and you’ve used up your protected retirement funds.

5. Borrowing from your retirement account can also be a problem- Be careful! You will be catching up by having extra money taken from your check to pay back the loan, but if you lose your job, or change jobs, the deductions will stop. Then, what started as a loan will end up as an early withdrawl, and the tax consequences I talked about above will apply.

Daniel J Winter
Law offices of Daniel J Winter
53 W Jackson Boulevard
Suite 725
Chicago, IL 60604
312-789-9999
djw@dwinterlaw.com
BankruptcyLawChicago.com