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Raiding your retirement account to repay debt and avert the risk of filing bankruptcy


When you owe a mountain of credit card debt, is it better to file bankruptcy or take help of the professional debt relief options or raid your retirement fund? This is a million-dollar question asked by the debtors who are saddled with debt but yet don’t have enough money to repay them and avoid bankruptcy. Whenever your debt problems are spiraling out of control and you see your personal debt ceiling rising higher, at a certain point of time, you might feel the strong urge of raiding your retirement account (whether 401(k) or IRA) to pay off your present debt obligations. The temptation gets stronger when you see that you can easily borrow money from the retirement account without having to worry about your credit score or any lender. However, although you might be tantalized at the thought of borrowing money from your 401(k), deep down inside, you must be wondering whether it’s worth sacrificing the little money that you’ve been saving for your children in order to pay off your revolving debt burden.

Experts recommend against the idea of withdrawing money before you retire

In an ideal situation, the retirement fund should be withdrawn only after you retire. If you’re wondering about the reasons behind the large number of people who advise against withdrawing money from a 401(k) or an IRA, you can be sure that there is a wide array of reasons behind not considering your retirement account while paying off debt. The biggest reason is that your retirement account is tax-deferred and while deposit the funds in this account, you don’t pay taxes on them. But when you withdraw money from this account before you reach your retirement age, you need to pay taxes on it. In fact, in some cases, you even incur a huge penalty and fees due to early withdrawal.

You often require complying with a different number of conditions when it comes to withdrawing money from your retirement account. In most cases, if you aren’t able to repay the amount that you withdrew within 5 years, you can be charged a huge amount as penalty charges. This also implies that you won’t be able to retire peacefully unless you repay the entire debt amount. In case you get laid off during this period of time, you can be sure that your finances will be in a state of peril. In fact, even when you fail to repay the amount within 5 years, this amount might be considered as a distribution amount and taxes might be charged in accordance with your present income.

Are any circumstances an exception?

You should remember that not all drastic situations can be dealt in the same manner. If you see that you’re not being able to tackle your soaring monthly bills despite getting a second job or cutting down your expenses, liquidating your retirement account can certainly be the only option for you. This means that under extreme conditions, when you’re carrying an overwhelmingly large amount of debt, you can certainly opt for liquidation of the retirement account.

Therefore, when it comes to repaying your debt to avert the hassles of filing bankruptcy, measure your options. Check if you can get help of a professional company to repay your debts or grab a new job that gives you a steady source of income. If nothing works, you might consider withdrawing money from your retirement account.

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