When you are in a pinch, it might seem like dipping into retirement savings is the best way to pay off debt. Usually, this isn’t the case.
Why You Shouldn’t Pay Off Debt with Your Retirement Savings
- It might be possible to pay off another way: If you are looking at a sizable, but not massive debt, the best option may be a debt payment plan. Rather than incurring the taxes that come from pulling money from retirement, you can instead sit down and build a plan to pay off debts a little bit at the time. If the size of the debt seems too daunting, you can work with professionals to create a debt settlement plan.
- Savings won’t go as far as you think: If you pull from retirement you’ll be shortchanging your future. You’ll have to pay income taxes on that money, then you will also typically get hit with a 10 percent early withdrawal fee. One of the worst outcomes could be cashing out your retirement only to find that there isn’t enough to pay off your debts.
- Bankruptcy is often a better option: Many turn to retirement savings when really they should file for bankruptcy. Most people don’t know that crucial assets such as your home and your retirement can be protected in a personal bankruptcy. If you are facing an unmanageable debt, you can often get out from under it without losing your life’s savings.
In most cases, you should only use your retirement accounts when you have exhausted all other possible options. Otherwise, it’s better to keep that money for your future. There is almost always a better way to get your finances back on track.
Shuster Law Firm PLLCand Shuster is a firm of Texas bankruptcy lawyers who fight to help their clients escape debts and find a brighter financial future.