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Should I use my IRA to pay off debts?

Posted on Jan 28, 2009 in Bankruptcy

Clients often ask if they should avoid bankruptcy by paying off their debts using their IRA or 401k plans.  There are many reasons why I suggest they not do so.  Here are the top 10 reasons to keep your IRA or 401k and save it for retirement.

  1. Your IRA or 401k plan is exempt.  Creditors cannot collect anything from it.  You get to keep it until you need it for retirement.
  2. If you take money out of your IRA or 401k plan, you have to pay income taxes on it right now.  If you can’t afford to pay your debts, you probably can’t afford to pay extra income tax either.  That means you’d have to take out even more money from your IRA or 401k plan to stay even
  3. If you take money out of your IRA or 401k plan, you have to pay a 10% penalty in many cases.
  4. If you take money out of your IRA or 401k plan today, you are losing a lot because the market has declined drastically.
  5. If you take money out of your IRA or 401k plan today, you no longer are gaining the opportunity of increasing value over time, through appreciation or reinvestment of dividends.
  6. Who knows what’s going to happen to Social Security anyway?
  7. Do you really want to work until you are 85?
  8. Do you really want to depend on your children to support you?
  9. Do you really want to depend on strangers to support you?
  10. It’s called a “Retirement Account” – not a “rainy day fund.”

I could go on but you get the idea.  The answer is no.  Don’t do it.

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