Is It Smart to Take Money Out of Your 401(k) to Avoid Filing for Bankruptcy?

People may rush to use all of their resources to make payments when they are confronted with mounting financial problems. It’s important to remember that this isn’t always the best option. Before using your retirement assets to settle debts, you should give all of your options, including bankruptcy, some serious consideration.

In many cases, filing for Chapter 13 or Chapter 7 bankruptcy may provide much more significant long-term debt relief than withdrawing funds from or borrowing against your 401(k) (k). After reading this article, call Winterbotham Parham Teeple, a PC at 800.400.9000 to schedule a free consultation with an experienced California bankruptcy lawyer.

Issues With 401(k) Loans

It may be quite tempting to consider your 401(k) as just another asset that you should always have access to. However, the government has created some excellent incentives for you to do so because your 401(k) is really only meant to be used for retirement savings.

You can take out loans against your 401(k) (k). If you can negotiate a low-interest rate, taking out a 401(k) loan to pay off a high-interest obligation might make sense. The amount of interest you would save by paying off that loan more quickly must, however, be sufficient to outweigh the risk of withdrawing funds from your 401(k) (k).

You can take out loans against your 401(k), however you will have to make monthly payments on this loan, typically coming directly out of your pay check, which will put further strain on your monthly budget. Alternatively, if you default on your loan for any reason, You will be assessed income tax on the loan amount and a 10% early distribution penalty if you are under the age of 59.5 if you default on your 401(k) loan for any reason. If you are careless, tThese expenses may negate the advantages of obtaining the loan in the first place.

Never assume that you won’t go through this. There are many potential reasons why you might find it difficult to repay your 401(k) loan, some of which are out of your control. It’s possible, for instance, that your employer will go out of business or that you’ll need to quit your job abruptly in order to move closer to your family. In such a case, your loan will frequently become fully due within 60 days of your employment ending, and it’s likely that you won’t have the money to pay it back.

Don’t Drain Your Retirement Savings

Alternatively, some people decide to take a 401(k) cash out to pay their debts instead of a loan. Not only will you have to pay a tax penalty, but you will be robbing yourself of your future retirement. You don’t want to find yourself in a situation where you have no retirement and a tax bill owed for cashing out too soon.

Bankruptcy Provides An Alternative.

Many people are so terrified of debt that they will do anything, even jeopardize their retirement, to avoid it. They are not aware that there are other debt-relief options available to them that would allow them to preserve their retirement assets. Chapter 7 or Chapter 13 bankruptcy may be a valid option to give you debt relief and California exemptions typically allow you to fully protect your retirement accounts, meaning you may be able to become debt free without harming your future self.

An excellent example of a debt relief alternative to selling retirement assets is the wage earner bankruptcy process, also known as Chapter 13. In this kind of bankruptcy, all of your debts will be consolidated into a single, 3-5 year court-sponsored repayment plan. The court will determine your payment based on your ability to pay; you won’t accrue any additional late fees or penalties throughout the procedure.

The best part is that Chapter 13 bankruptcy won’t affect the vast majority of your assets. This covers exemptions from 401(k) and IRA taxes totaling more than $1 million. Please call Winterbotham Parham Teeple, a PC at 800.400.9000 for advice prior to taking that 401(k) loan! We may be able to offer you a better choice.