Using your Retirement Savings to Pay Off Debts

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Dipping into your 401k to pay off debts may be tempting, but this article from the NY Times explains how people get into trouble by double and triple dipping. For those that dig into the 401k, one dip is usually not enough.

We often see clients who take a loan from their 401k to pay off debt and only pay off part of the debt. Then the rest of the debt comes back to bite them, they still have to file bankruptcy and they have that much less 401k retirement savings.  The withdrawal they made accomplished nothing except to deplete their retirement funds.

A 401k cannot is fully protected in bankruptcy and cannot be touched or taken. If you borrow from a 401k and pay off ALL the debt, this strategy might make sense. But if you don’t pay all of the debt and end up in bankruptcy, you will have less savings to draw from.

Serial borrowing can put a serious dent in long-term savings, especially if you cannot continue to save as much while paying on the loan. Since the money is no longer invested, you will loose investment earnings.

And there are hidden costs that you may not have considered, as stated in the NYTimes: “You actually end up paying taxes twice on the interest: the interest you pay yourself comes from after-tax wages and you pay taxes on that amount again when you withdraw the money in retirement.”

If you are in serious debt and considering a dip into your 401k, we encourage you to consult a bankruptcy lawyer first. The experts at Cossitt Law can help you understand the pros and cons of your options so you can make an informed decision with confidence.



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