If you struggle with overwhelming debt due to any number of reasons, you are not alone. Thousands of people in the Tri Valley and San Joaquin area are facing insurmountable credit card balances, student loans or medical bills through no fault of their own. To alleviate this debt, you may find yourself wanting to use the money in a retirement fund to pay down some of your bills. Though each case is different, my overwhelming reaction to this is do NOT do it–and I will tell you why.
Using your retirement funds, such as an IRA or 401 (k) account, to pay down current debt will come with hefty penalties and cost you much more in the end. If you money is in a traditional IRA or 401 (k) plan, you will incur a 10% penalty for any money taken out. The second way you could be penalized potentially is if the money you remove moves you to a higher tax bracket. Since taking money out of these funds counts as income earned for the year, you may increase your income to a point that bumps you into a higher tax bracket thus costing you more in taxes for the year.
And perhaps one of the most important reasons not to take money out of your retirement funds now is that by doing so you will ultimately decrease the amount of money you will have for retirement. Do you want to be in your 60s and 70s worried about how to pay the bills? Removing funds now decreases the funds’ growth potential. The goal of a retirement fund is to grow and appreciate over the years. You want that money to be there when you reach retirement age.
Before making any decisions, you need to ask yourself how much working life do you have left to replenish your retirement account? Do you have an alternative pension or retirement plan from an employer that will be there once you retire? Are there other assets or items with equity you can use in your retirement years to supplement you financially?
If you are considering dipping into your retirement funds, you are dealing with a larger and overwhelming debt problem. It is best to seek financial counseling from a professional who can guide you in the right direction to a solution that will not place your financial future in jeopardy. Bankruptcy may be the right option for you which has no tax ramifications.
Khan Law is here to listen and help you. We are driven by the belief that our clients deserve personal attention and service. As an advocate for your needs, we understand how consuming financial stress can be. We will guide you to a solution that will relieve your worries and financial burden. Schedule a complimentary phone consultation to determine what would work best for your situation.