At any given moment, many people are considering bankruptcy. They do so for a variety of reasons, such as job loss, medical debt and crippling credit card bills. However, some feel tempted to dip into one last account, their retirement account, before they meet with an attorney.
This frequently turns out to be a big mistake.
Retirement accounts have protections
When you file for bankruptcy, you cannot touch your retirement accounts. Things you can touch are your house, car, and the cash in your checking or savings account. But your retirement account? No. So, if you take money out of it to pay down your debt, you are out that much money plus its potential future income. All in all, you could be cheating yourself out of hundreds of thousands of dollars. If you invested $5,000 per year in your account from age 25 to 35, that 10 years' worth of investing could net you more than $1 million.
The problem remains
Unfortunately, many people find out that paying down their debts with retirement funds does not always solve the underlying problem. For example, if you lost your job and are behind on debt payments, you may think that taking out $20,000 in retirement funds to pay down debt buys you a few months until you find a new job. What happens, though, if you cannot find employment? You build up new debt, plus you are out that $20,000 and its investing potential. Similarly, if you take out retirement money to pay down a credit card bill but continue to charge a lot for groceries, medical bills and other expenses, the foundational problem remains.
You may still have most of these issues if you file for bankruptcy, but at least your retirement accounts will be intact and waiting for you when you retire. Having that financial peace of mind is an invaluable proposition indeed. So, while it can be tempting to use retirement funds to pay down current debts, it often is not the wisest option.