Most people go to great lengths to avoid bankruptcy. Retirement savings accounts are one of the last wells people tap into before filing bankruptcy. While working through debt problems is desirable, it should not come at the expense of your long term well being. Find out why you should never use your retirement savings to avoid bankruptcy.
Retirement accounts are exempt.
One of the reasons people cash in their retirement to pay down debt is the mistaken belief that the bankruptcy court will take the assets anyway. Many people do not understand the bankruptcy exemption system. Many people do not understand that you do not need to give up all of your assets to get out of debt.
Bankruptcy allows individuals to utilize a series of exemptions to protect personal assets. Each state has different rules. In Minnesota, individuals filing bankruptcy have the option of filing using either a federal or state set of bankruptcy exemptions. In Minnesota, retirement assets are exempt from being taken by the court under both sets of exemptions.
Cashing in your retirement now could cost you now and in the long run.
People often underestimate the cost of cashing in their retirement. The IRS charges a 10 percent tax penalty for withdrawing your 401k, 403b, IRA, Roth IRA or pension before the age of 59 ½. In addition, Minnesota taxes that money as income in the year that is taken. Not only is this money effectively lost, but you also lose the ability for that money to grow over time. An investment of $1,000 in an IRA earning five percent quarterly would grow to $2,701 in 20 years time.
Bankruptcy is not as bad as you think
Most people have an aversion to bankruptcy because they do not understand it. There are still many myths about bankruptcy. Before you decide to cash in your retirement, it may make sense to sit down with a bankruptcy attorney and learn about your options. Bankruptcy may be your best choice.
Often people who attempt to avoid bankruptcy by cashing in their retirement end up filing for bankruptcy anyway. A bankruptcy attorney can not only explain how the bankruptcy process works, but can also help you create a budget that works so you can get back on your feet again.