It seems pretty harmless at first. The first several years, even decades go by as you begin to build a retirement savings. You feel proud that you are on your way to retirement. What an accomplishment that would be; to have enough money to retire one day. Then, life happens and the kids need to go off to college; parents are aging and need support; an accident happened to your husband. Now what?
Debt begins to pile up slowly at first, just like the retirement nest egg. It takes years, even decades for it to creep up on you. We don’t even notice the debt at first. We just fit it into the budget and make a payment plan. Then, one day it suddenly becomes unmanageable. Here comes the question:
Should I use retirement accounts to pay off my debts?
The real threat to your retirement accounts is YOU. Your retirement accounts are safe from creditors. This means that if you filed for bankruptcy, you could eliminate your debt and keep your retirement account(s). All of it. Also, under California laws, your retirement accounts are protected from a levy or lien too. And remember, no one else has the power to pull money from your account.
When you make early withdrawals from your retirement account and you don’t pay that money back, you will incur early withdrawal penalties and taxes. These costs can cut your net check nearly in half! Even if you borrowed money from your 401k, then you’re losing out on the precious time value of money. Don’t know what the time value of money is? Click here.
So, the next time you’re facing unmanageable debts and you think that pulling money from your retirement account is a good idea, it’s time to consult with your local bankruptcy attorney to see if you might have another option. For more information on the saving vs. eliminating debt conversation, click here. Thanks to Cathy Moran for her article on this subject, here.