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Should you use retirement funds to cover outstanding debts?

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Considerable debt presents many struggles that can leave you feeling at a loss. Although a variety of seemingly beneficial debt relief options exist, you may wonder which could work best for you. You may even have concerns regarding the legitimacy of some of those relief options. Because a lack of information may leave you feeling apprehensive, you may consider dipping into your retirement accounts instead.

At first, you could think that this option seems obvious and wise as you need money to cover your outstanding debts and funds exist in your IRA and 401(k). However, there are many downsides to withdrawing funds from your retirement accounts early.

Using IRA funds to pay bills

An IRA is a great way to build up your retirement fund. However, you never want to use it as a backup cash pool. If you withdraw money from your IRA in order to cover some bills, you will be taxed on the amount of money you withdraw. Additionally, a 10 percent penalty will likely also apply for early withdrawal.

Due to the negative repercussions of early withdrawal, you will not only need to take out enough money to cover your existing debts, but you would also need to withdraw more funds to cover the taxes and penalties that will come about. As a result, you could lose out on a considerable amount of money when it comes time to retire.

Using 401(k) funds to pay off debt

If you have a 401(k) as a benefit from your employer, you may feel more comfortable thinking about your future finances after retirement. Substantial debt may have you itching to use those funds to cover your balances. However, funds in this type of retirement account typically remain off limits unless you change jobs or face dire financial straits.

While you can take a loan from your 401(k), you must pay it back with interest. The low interest rate may seem attractive. But, if you lose or quit your job, you may have to repay the entire amount within 60 days or face a 10 percent penalty.

Bankruptcy

Rather than eyeing your retirement funds to cover your debt, learn how bankruptcy can help you save your money for your retirement. This debt relief method protects funds in your retirement account while allowing you to address your outstanding balances.

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