If you are struggling with your finances, it is only natural to look to other sources of funds to pay off your debts. As a result, you may consider your retirement accounts as a means of paying down your debts. Although wanting to pay back your debts is an understandable sentiment, using your retirement assets to do so would only weaken your long-term financial situation. If your debt is unmanageable, bankruptcy would be a better solution that would have fewer negative repercussions over the long run.
One reason why retirement assets should not be used to pay off debts is that using them will needlessly cost you money. When you withdraw money early from these accounts, you must pay an early withdrawal penalty. Also, you may be subject to tax consequences. Due to these financial penalties, you will likely end up having to withdraw more money than the amount of the debt in order to also cover the penalties. Even if you could get your retirement money out without penalty, the loss of compound growth by not having the money in your retirement can be enormous.
Another reason why you should not raid your retirement accounts to pay debts is because these accounts are exempt from the reach of creditors during bankruptcy. This means that your creditors cannot force you to use the funds within these accounts to pay your debts, if you file bankruptcy. Exempt accounts under the bankruptcy laws include:
• 401(k)s and 403(b)s
• Traditional and Roth IRAs (exempt up to $1,245,475)
• Keogh plans
• Most defined benefit plans
While most people are under the mistaken impression that bankruptcy causes filers to lose all their assets, retirement assets remain untouched throughout the bankruptcy process. As soon as bankruptcy is completed, most of your pre-bankruptcy debt has been eliminated, so you are able to start over again financially with your retirement assets unaffected. The bottom line is that you are highly likely to regret liquidating your retirement to pay bills when there are other less expensive solutions available.
Notwithstanding the above, it is important to know that retirement accounts cannot be used as a means of defrauding your creditors. As soon as you file Chapter 7 or Chapter 13 bankruptcy, the transfers you made just before bankruptcy are examined. If the court determines that you attempted to shield non-retirement assets from creditors by transferring them into your retirement accounts just before you filed bankruptcy, the court may remove the exempt status of these accounts, allowing the funds within to be used to satisfy your debts. In other words, don’t transfer a bunch of money into your retirement accounts right before bankruptcy without getting good advice from an attorney first.
An attorney can tell you more
Unfortunately, the exemption status of retirement accounts is not always well known. As a result, many people needlessly use these funds to avoid bankruptcy, due to misconceptions about the process. However, in doing so, they essentially steal from their futures to pay a debt of today.
If you are carrying debts that you cannot repay, it is important to learn about the options available to you. The experienced bankruptcy attorneys at Reed Law Firm, P.A. can listen to your situation, outline possible solutions and recommend the best debt relief option to get you out of the tough financial circumstances in which you find yourself.