Should people use retirement accounts to pay off debt?
Using retirement accounts to pay off debt can be disastrous, but filing bankruptcy provides debt relief without destroying future support.
Creditor calls, threats of wage garnishment and the potential to lose valuable assets such as homes and vehicles can have people considering drastic measures to obtain some relief from the stress. Someone who has retirement accounts may think that withdrawing this money is a good way to catch up on bills and get some breathing room.
However, there are many reasons why this is a bad idea.
The disadvantages of using retirement accounts to pay debt.
Withdrawing money from a retirement account immediately diminishes the value of the asset considerably due to penalties and taxes. The IRS explains that any contributions of pre-tax dollars will be subject to federal and state income tax rates. The penalty over and above income tax could be 10% if the owner withdraws the money before the age of 59 ½.
As significant as this loss is, destroying the value of the account in the present may not be as impactful as the loss of future dollars the account would have created. That income source may be vital for financial security later in life.
Will the financial situation be completely rectified after using the retirement accounts? For many, the funds are only a stopgap measure that does not resolve the actual issue of an imbalanced debt-to-income ratio. The result is an unsustainable financial situation compounded by the loss of future support.
The benefits of filing bankruptcy to wipe out debt.
Many people think of bankruptcy as a last resort, but in fact, using retirement accounts should be a last resort. Filing for bankruptcy is a solution that can provide true relief from debt and not just temporary breathing room. Chapter 7 discharges debt, and Chapter 13 involves restructuring debt and creating a payment plan that is better designed to fit an individual’s ability to pay.
For those who worry about the loss of assets, Florida’s bankruptcy exemptions can provide peace of mind. Many people are able to keep their home and vehicle and other personal property in both Chapter 7 and Chapter 13 bankruptcies.
And the retirement accounts? According to Florida statutes, many of these are exempt, too, including employer-sponsored plans and pensions such as 401(k) and 403(b) plans, SIMPLE IRAs, and profit-sharing plans.
Ultimately, not only do bankruptcy filers restore balance to their present circumstances, but they also preserve their futures, as well. Our Miami bankruptcy attorneys have experience with the process and can help people identify their assets, debts, and exemptions so they can choose the type of bankruptcy that suits their circumstances. When you schedule a free initial consultation at Kingcade Garcia McMaken, you will meet with an attorney who will help you analyze your financial needs. We can assist you in identifying the best way to keep your assets and manage your finances and properties in the face of serious challenges.