Don’t use your retirement savings to pay off your debts
Are you dealing with financial difficulties right now? Are you buried by credit card or medical debt? Are you behind on your mortgage payments?
If you are struggling with debt and trying to decide how to pay it off, the last thing you want to do is pay it off with your savings or retirement accounts.
Why you shouldn’t pay your debts with your retirement savings
You have worked hard to save for your retirement. If you have amassed a nice sum, it can be very tempting to pay off nagging debts with that money. Do not give into temptation. It is just not worth the price you will pay.
The reason the IRS created tax incentives for 401(k) and other retirement account contributions is to encourage people to save for their futures. A small amount tucked away on a monthly or weekly basis can add up over the years – provided you leave it tucked away.
Making a withdrawal from your savings jeopardizes your financial future and maybe your ability to retire at all. Too many people assume that they will be able to make up that savings once their debts are paid. Unfortunately, that rarely happens.
Not only will it be very difficult – maybe impossible – to rebuild your savings, you will also pay a large portion of the amount you take to the IRS by withdrawing early.
- Income taxes: You will be taxed at your current tax rate, which can be more than 30 percent.
- Penalties: You will be penalized at a rate of 10 percent just for making the withdrawal.
Is bankruptcy a better option for you?
Bankruptcy does not mean failure. The bankruptcy code was created to help people just like you obtain a fresh start. Don’t believe the myths you’ve heard about bankruptcy, and don’t jeopardize your retirement. Learn about your options during a free consultation with a lawyer at the law firm of Nowack & Olson, PLLC.