When faced with debt problems, many people become desperate and turn to virtually any assets they have as a way of paying off their debts. One asset that many see as a solution to their problems is retirement funds. Although it may be tempting to use your retire ment assets to pay off your outstanding debts, it is generally a poor idea to do so for two main reasons.
If you are having financial problems, the first reason why you should not touch your retirement assets is that doing so will cost you a significant amount of money-both in the short and long term. Virtually all retirement accounts levy penalties on withdrawals before retirement age. Additionally, early withdrawals are subject to income taxes. Because of these facts, if you make an early withdrawal, you will likely need to withdraw more than you anticipated to cover your debts plus the penalties and taxes.
Aside from the instant costs, early withdrawals also will cause you to miss out on the growth that would have occurred over the long run. Since you will not enjoy the compound growth on the withdrawn assets that occurs over time, you may find that your early withdrawal can cause you to have a significantly lower account balance once you reach retirement age, which may affect your ability to retire as planned.
The second primary reason why you should not use your retirement accounts to pay down your debts is that these assets are protected from your creditors by the bankruptcy laws. As a result, if you file for bankruptcy to deal with your debt problems, your creditors cannot use these accounts to satisfy your outstanding debts. Most major retirement accounts qualify for this treatment including:
• Traditional and Roth IRAs
• Defined benefit plans
• Keogh plans
Since your retirement accounts are protected in bankruptcy, you can seek the protection of bankruptcy without worrying about losing the assets that you have worked your entire career to accumulate. Once you complete bankruptcy, most of your pre-bankruptcy debts are eliminated. However, your retirement accounts remain intact.
Although retirement accounts are protected in bankruptcy, they cannot be used as a means of defrauding your creditors. If you attempt to shield assets from your creditors by transferring them into your retirement accounts before you file bankruptcy, the bankruptcy court may remove the protections afforded your accounts. As a result, your creditors may then use the assets contained within to satisfy your outstanding debts.
Speak with an attorney, if in debt
If you are suffering financial problems, it may seem helpless. However, doing nothing can cause your situation to worsen. An experienced bankruptcy attorney can review your financial status and recommend the best way of returning you to financial health.