Can I withdraw money from my retirement account to pay creditors?
It’s a fair question, and one that initially makes a lot of sense.
If you’re receiving harassing phone calls from creditors and cannot make ends meet with your current income, it can be very tempting to withdraw from a retirement fund to pay down the debts.
However, in almost all circumstances this is a worse method to solve debt problems than filing for bankruptcy relief.
Why shouldn’t I withdraw money from my retirement account to pay creditors?
Here are the main reasons you shouldn’t withdraw money from your retirement account to pay creditors below.
1. Most people don’t have enough retirement money to pay creditors
Most people who choose to use retirement funds to pay debts burn through all of the allowable withdrawal balance before paying off their debts.
You’re likely to lose lots of your retirement money, but will still have debt collectors:
- Calling you
- Garnishing your wages
- Levying your bank accounts
This means you will probably have to file for Chapter 7 bankruptcy or Chapter 13 bankruptcy anyhow.
2. Retirement accounts are generally protected in bankruptcy
You might not know that, in most cases, you can keep all of the money in your retirement account when you file for bankruptcy.
This means that your creditors have no right to this money.
Why should you voluntarily give it to them when you could discharge the debts in bankruptcy, and keep your retirement money?
So, if you file for Chapter 7 bankruptcy or Chapter 13 bankruptcy instead of spending your retirement money, you will end up with no debts, and still keep all of your retirement accounts.
This is the best outcome, and can allow you to emerge from a bankruptcy with substantial net worth.
3. Early withdrawal of retirement funds can lead to taxes and penalties
Withdrawing money from a retirement account and not paying it back often results in substantial tax penalties, that can put you further in debt, and are not dischargeable in bankruptcy.
- Taxes are much more difficult, and often impossible, to discharge in bankruptcy
- Withdrawing money from you retirement account can mean you trade your credit card debt and medical bills for the IRS
- The IRS has stronger collection powers and is much more likely to survive bankruptcy than other creditors
So, if you withdraw your retirement money you are likely to trade consumer debts for tax debts AND lose financial security in your retirement.
4. You will need your retirement money after you stop working
Retirement and medical costs are becoming increasingly expensive, and it is unwise to put yourself at financial risk simply to pay off your dischargeable debts.
Still not convinced?
If you withdraw money from your retirement account to pay creditors, you may:
- Jeopardize your retirement
- Lose lots of money to taxes and penalties
- Be unable to pay off your debts, because many Americans owe more in debts than they have in retirement accounts
However, when you file Chapeter 7 Bankruptcy or Chapter 13 Bankruptcy, you:
- Keep every dollar in your retirement account
- Don’t owe any taxes
- Can discharge credit card, medical, and other consumer debts
If you are considering using money from your retirement account to pay off debt, then why not Contact Us at 612.724.4357 now and tell us how we can help you.
Alternatively, why not visit one of our offices in Minneapolis, St Paul, Blaine, or Brooklyn Park?
Photo credit: © Robert Byron | Dreamstime.com