Before you go raiding your retirement accounts to pay off your credit card debt you need to know the consequences. When creditors are calling you, your family, your work – harassing you and threatening lawsuits, it’s really tempting to look at the money sitting in an IRA or 401k plan, as a quick fix.
STOP! There are a couple of reasons this short-term solution may not be such a good idea:
1. An early withdrawal from a 401k can have income tax consequences. Say you are younger than 59 & 1/2, and you take out $50,000.00. This will trigger a 10% penalty for early withdrawal. If you earn $75,000.00/yr., that puts you in the 25% tax bracket. So adding the penalty plus tax rate you are now paying a 35% cost to obtain access to your money, which reduces your $50,000.00 to $32,500.00.
2. You’re trading consumer debt for an IRS debt, and the IRS debt would survive bankruptcy if left unpaid.
3. This is your RETIREMENT. You are putting the quality of your later years at risk. That’s money you will need when you stop working to eat, pay rent and transportation. Some of your expenses, particularly medical, may increase. Many people are under the impressions they will have to give up retirement money if they file bankruptcy. Retirement accounts are protected under the bankruptcy code. This means neither creditors nor trustees can take any of this money from you. So, instead of spending your hard earned and irreplaceable retirement to pay your debts, consider filing bankruptcy instead. You will keep all your retirement savings. You will safeguard the financial lifeline to happiness in your golden years and obtain the freedom and peace of mind that should accompany a successful departure from the workplace.
Don’t do anything without first calling us at (808) 528-4274. Your retirement is only protected when it remains in an IRA, 401k or other retirement account. If you cash it out and deposit the money in your bank account, those funds have lost the special protections bankruptcy affords. We offer a free consultation – just give us a call to arrange a meeting at either of our conveniently located offices.