If you are short of money at the end of the month, try not to use your retirement savings to make ends meet. Many people do this, and I am sure they know better but think that the short-term rewards of keeping current on their bills makes it worth-while. This is not the case if you are thinking about bankruptcy. If this is something you are doing, please see a bankruptcy attorney immediately to receive some sage advice. There are very few instances where it makes any sense to use these funds before retirement. In short, these accounts would be protected from creditors in a bankruptcy in almost every case. In most cases, these decisions will come back to haunt you in the future.
The reasons for this are three-fold. First, you will likely pay penalties to the IRS for tapping into your retirement savings early. Many forms of IRA’s and 401(k)’s have an early withdrawal penalty associated with them. Most people don’t pay this when they actually withdraw the money from their retirement account. When the IRS hits you with the bill at the end of the tax year, it is never pleasant. Most folks do not expect this, and it causes a bad situation to actually get worse. You don’t need these IRS issues. Back taxes are difficult to include in a bankruptcy. In most cases, they will survive the bankruptcy and will need to be paid sometime during or after the bankruptcy.
To top it off, you will likely owe a tax on the money you took out because the money had never been taxed in the first place. This is the second reason to avoid taking out your hard-earned retirement funds early. Most retirement funds are tax-deferred programs which allow you to put away money before you pay taxes on it. This tax will come due someday, but that day is supposed to be many years into the future when you are retired and you take the money out in amounts that you can live on. By then, your money will have grown exponentially (hopefully!) and the tax bite can be handled because it is planned for. Some plans, like Roth IRA’s, don’t have this problem. But still, it is a wise practice to stay out of the retirement cookie jar.
The third reason, and most important, is that you need these funds to retire with many years down the road!! If your finances are in such dire straits that you need to meet your monthly needs by tapping these funds, then you need to see a Bankruptcy Attorney for advice. Bankruptcy attorneys are an honest lot and they will tell you whether you have reason to consider bankruptcy. If it’s not for you, they will tell you this. You will also receive advice as to what your options are. At least then you can be informed about the dangers of using your retirement funds to pay bills.
If you do end up filing for bankruptcy, your retirement savings can generally be protected!! They can be preserved for you, and can then be available to you after the bankruptcy discharges all of you allowable debts. Too many people waste $10’s of thousands of dollars of retirement funds before finally filing for bankruptcy. If they had just gone to see a Bankruptcy Attorney in Mount Vernon, they would have been able to keep it and use it for their golden years.
In summary, avoid adding non-dischargeable debts like tax bills and don’t use funds to pay bills that can be protected in a bankruptcy. Doing these things have a snowball effect in your financial situation. If this sounds like something you are doing or are thinking of doing, my hope is that you will seek legal counsel now. It is never too early to see a Bankruptcy Attorney. He or she might just save you thousands of dollars!