Financial Problems Can Occur at Any Age.
For those who are older and facing financial challenges as they near retirement, the idea of using retirement savings to avoid bankruptcy is likely not something you’d consider.
However, if you’re middle-aged or younger when financial disaster strikes, the money you’ve set aside for retirement could pose a big temptation. After all, you’re decades from retirement, so wouldn’t it be better to use that money to repair your current financial problems?
The simplest answer is “no.”
Retirement savings should never be used to prevent bankruptcy. Even if you haven’t reached the point of considering bankruptcy, it’s still not a smart financial move to pull from retirement savings to deal with unsecured debt.
You’ll Be Penalized for Withdrawing from Retirement Savings Early
Retirement savings is protected from being taxed when it’s saved. Most of the money that you put into traditional retirement savings will not be taxed until you withdraw it.
However, if you withdraw it early, there’s a penalty and the money is taxed as income for that year. You’ll need to report any money you pull out of retirement savings when you file your income tax with the IRS.
You can learn more about how the IRS deals with early retirement savings withdraws here.
You’ll Lose the Benefit of Retirement Savings Protection If You File for Bankruptcy
Retirement savings is also protected when you file for bankruptcy. It’s listed as an exemption, which means it cannot be liquidated to pay your creditors.
A person could have hundreds of thousands of dollars or more in retirement accounts and a trustee will not be able to take it to pay debts because of the exemption.
The only exception to this rule is if someone filing for bankruptcy tries to disguise money in a retirement account. If money is deposited in a larger than normal amount into these accounts within a short period of time before filing for bankruptcy, the trustee could call the deposit into question.
Retirement Savings is Better Left for Retirement
Having solid retirement savings gives you peace of mind later in life, but it’s often something we take for granted when we’re younger. It’s tough to consider decades into the future when you are dealing with an immediate financial strain.
This is one of the reasons it’s so tempting to use retirement funds to deal with a debt crisis. The money is there, it’s yours, and it could help you, in theory. Unfortunately, using it can make your situation much worse – immediately and when you’re nearing retirement.
Before pulling money from your retirement savings to deal with your current debt, consider speaking to an attorney. He or she can help you evaluate your situation and determine whether bankruptcy would be your best option. Regardless whether bankruptcy is ahead for you, it’s important to not make any rash decisions without speaking to a debt expert first.
If you have questions about bankruptcy or you are wondering if using the money you’ve saved might be a good way to deal with a debt problem, we can help. Contact the Law Office of Robert M. Geller at (813)254-5696 to schedule a free consultation.