Using Your Retirement to Pay Debt?
Despite warnings from financial experts, more debtors are withdrawing money from their retirement account to pay off debt and avoid bankruptcy. But early withdrawal of money from a retirement account, even if it is in the form of a loan, can have terrible consequences for the debtor.
Below are a few:
- Early withdrawal from retirement accounts could cost the debtor up to 30% in taxes plus a 10 percent early withdrawal penalty if they are younger than 59 ½ years old.
- Debtors who withdraw money from their retirement account to pay debt and avoid bankruptcy will not be able to make any contributions into their account for six months afterwards.
- When a debtor withdraws money from their retirement account in an effort to pay back debt and avoid bankruptcy, what they are really doing is giving creditors access to resources that are otherwise exempt. For example, if a debtor has withdrawn retirement funds and placed them into a bank account, a creditor may be able to seize that money if they have a judgment already. But if a debtor files bankruptcy, not only are all collections actions stopped, creditors don't have the power to seize money held in qualifying retirement accounts.
- Even if a debtor takes out a loan against their retirement account, while they may not be subjected to taxes and penalty fees, they will be required to pay back the money immediately if they are fired from their job or quit.
In the case of a loan taken out against a retirement account, if they debtor is unable to pay for any reason, the loan will be treated as a withdrawal and will be subjected to taxes and possible penalty fees depending on the debtor's age.