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In debt? Here's why you shouldn't raid your retirement accounts

Living under a heavy burden of debt can be incredibly stressful. Most people feel strongly about making good on their financial obligations, and will go to great lengths to climb out from under a mountain of debt. While attempting to repay outstanding debts makes sense in many cases, individuals should be mindful of how they approach debt repayment. When faced with large amounts of debt, many people are tempted to turn to their retirement accounts-whether IRA, 401(k), 403(b), 529 or pension--as a means of repaying their financial obligations. However, doing so can be financially devastating, both in the short and long term.

Fortunately, there are more practical ways to address debt problems while also maintaining financial security for the future. Personal bankruptcy is one option, and a choice that can make a world of difference for those who are struggling to repay debts. If you are struggling with financial matters, here are a few reasons why you should consider filing bankruptcy instead of using your retirement funds to repay your debts.

Cashing out incurs hefty fees

Withdrawals from a retirement account prior to reaching the age of 59½, incur an automatic tax penalty of 10 percent. Additionally, you must also report the amount withdrawn as income and pay taxes on it! As a result, you have not only lost the use of those monies forever, but may have also created a tax obligation you may not be able to easily pay. While it may be tempting to cash out such accounts to pay off significant debt, it rarely makes good financial sense in the end. Before making such a move, it is important to sit down and go over the numbers carefully, so that the actual cost of cashing out is clear.

Once withdrawn, retirement funds can't grow and are lost forever

One of the things that make 401(k), IRA and other retirement vehicles so appealing is the fact that the money that you set aside will continue to compound and grow, generally TAX FREE. Over time, retirement assets can grow substantially. Withdrawing money from your retirement account is at best a temporary solution whose short-term benefit rarely outweighs the loss of interest and compound growth that would have been earned if the funds had remained in place. Over the course of time, the losses from early withdrawals can be huge and incalculable.

Retirement funds are protected under bankruptcy law

Many people are unaware that the money they have set aside in a 401(k), IRA or other qualified retirement account is ENTIRELY EXEMPT from creditors in Bankruptcy. That means that neither the creditors nor the Court may take the funds and use them to pay down outstanding debts. As a result, filing for personal bankruptcy allows individuals the ability to have many of their debts eliminated, without requiring them to sacrifice a single penny of their hard-earned retirement savings in the process. A true "win-win" situation.

At Mariano & Coiro, P.C. we are always here to help. Feel free to contact us with any questions or concerns that you may have surrounding bankruptcy and other debt relief options. We understand the importance of regaining financial stability, and can work with you to find a solution for you particular needs.

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