A favorite tactic of debt collectors is to pressure you into taking money out of your retirement accounts to pay them off. Yet this is one of the worst financial moves you can possibly make.
Here’s why paying debts this way makes absolutely no sense at all.
Almost all retirement funds are exempt in bankruptcy.
All ERISA-qualified plans are protected. ERISA stands for Employment Retirement Income Security. That includes 401Ks, 403(b)s, 457(b)s, government plans, and tax-exempt organizational retirement plans. These are protected to an unlimited amount.
Non-ERISA plans, like IRAs, SEPs, and SIMPLE IRAs are protected up to $1,512,350. If you have $1 over the trustee will be able to take that $1, but everything else is safe. Most of our clients don’t have anywhere near that amount of money in their retirement plans.
Keep in mind that many individuals who try to pay out of their retirement plans to avoid bankruptcy just end up filing for bankruptcy anyway. And once you take the money out, we can’t get it back for you.
You could face hefty tax penalties.
Most retirement funds impose hefty early withdrawal penalties and taxes when you take the funds out too soon. That means you’re paying a premium just to pay some debt collector when doing so won’t even help your credit score. To be clear, you face a 10% tax penalty on the amount, and then the amount is added to your income, so you pay income tax on it, too.
Taking out a loan against the balance is no better. If you lose your job then the loan has to be paid back within 60 days or you end up paying a 10% tax penalty, plus income taxes, just as if you’d withdrawn the money normally.
Finally, you lose money that could be earning interest on your behalf, working towards supporting you in the future.
There are better ways to get creditors off your back.
The stress and pain of having to deal with debt collectors, past due notices, and the threat of repossession and foreclosure is hard to overstate.
While you may be trying to avoid bankruptcy with all your might, it might be the best financial decision you ever make. The truth is it will raise your credit score. It can protect your home and car, protect you from eviction, and protect you from lawsuits.
It will stop the phone from ringing and will wipe the slate clean.
Those companies will be fine. They’ve already written the loss off on their taxes. Don’t worry about them. Worry about yourself and your family…and don’t jeopardize your future to pay off some collector who doesn’t care about you or your family.
Need help? Contact our office for a free consultation.