Sometimes, one mistake leads to another. A common misstep people make in their finances is raiding their 401k or retirement account when things get tight. This often only partially solves the immediate bill problem and creates more issues down the line.
What they can’t see is the fact that raiding their retirement to pay present bills can cause later tax fallout. Taking money from retirement accounts usually causes tax liability. The withdrawal is counted as income that can push them into a higher tax bracket that can increase what they owe the government. As for the immediate withdrawal, the company that manages the withdrawal will usually hold back an estimated amount of taxes, causing a higher than anticipated withdrawal than initially intended.
The long-term result of a retirement withdrawal is less money down the road for actual retirement. The funds in the 401k may have taken years to accumulate, but only moments to spend when applied to present bills. The typical worker faces this dilemma somewhere near the middle to end of his or her career. This means that a decade or more of contributions can be wiped out overnight.
An alternative to this may be a Chapter 13 bankruptcy. What a Chapter 13 bankruptcy really equates to for many considering it is a kind of low interest short term loan without all the strings attached. In a typical 13 case, the client has 5 years (60 months) to pay out the balances. Over the term of the reorganization plan, the interest is usually 3% or less and could conceivably be no interest, depending on the person’s individual circumstances.
A bankruptcy reorganization (Chapter 13) is not for everyone in every situation. It is usually a better choice, however, than clearing out a retirement account. One important final note: Retirement accounts are usually exempt under Louisiana law. By clearing out the account, you are actually taking funds the legislature decided were important to your retirement and giving it to creditors that otherwise, would never have been able to touch those assets.
–Written By: Greg Gouner
–Written By: Greg Gouner
