If you are behind on your bills, it may be tempting to withdraw from a 401(k) account to pay off creditors or at least make a dent in the bills. But don’t do it.
Withdrawing money from your 401(k) or another retirement account only trades one problem for another. Not only are those funds taxed more heavily once they leave a retirement account, they also become fair game for creditors, whether you are ready to use those funds to pay them or not.
Why you have retirement savings in the first place
Everyone is encouraged to put away money for their retirement, and it is for good reason. As you reach your golden years, you probably don’t want to keep putting in long working hours. You may also want to spend time with grandchildren or travel.
If you take a large chunk out of 401(k) or other retirement accounts, you may not be able to recover these funds by the time you need them.
Retirement account protections
Bankruptcy laws largely recognize the protected status of 401(k) and other employer-based retirement plans. To varying extents they also recognize IRAs as an important part of a person’s retirement planning. Homestead laws vary from state to state, but the premise behind them is the same. Just because you need to file bankruptcy, it doesn’t mean you should be left desolate.
If 401(k) or other employer-based retirement money stays where it is, it is protected. If it is withdrawn, the protection goes away.
In Louisiana, IRA accounts have less protection than employer-based accounts. Credit card and medical bills can’t be paid with an IRA balance, but domestic-related financial obligations such as child support or spousal support may draw on funds from an IRA in order to get them caught up.
Filing for bankruptcy puts creditor collection efforts on hold and gives you a chance to regroup financially, whether it eliminates all of your unsecured debt through Chapter 7, or reduces your debt through Chapter 13 reorganization.
Our clients often say their only regret was not speaking with us sooner. If you find you are at your financial wit’s end due to credit card and medical bills, you don’t have to face your creditors alone. Rodd Richoux is ready to hear your story and guide you in making the best choice for your circumstances.