Should I take from my retirement account or home equity to pay off debt?

Authored by Wendy Witt, Esq.

NO. NO. NO.

First, your retirement account equity is 100% protected during both bankruptcies and lawsuits. The law recognizes that retirement monies are more important than paying creditors and must be available for your care in the future when you are not working. The law recognizes that society doesn't benefit ifyou become a ward of the state.

Second, we understand that you want to do everything you can to avoid bankruptcy but if a bankruptcy attorney says that bankruptcy is inevitable, it is. There is no sense to blowing through your retirement account and having to file bankruptcy anyway.

Third, when you take assets out of traditional retirement accounts, it is a taxable event. You will have to pay income taxes on every dollar you take out; in addition, if you take a distribution early, you will be subject to the mandatory 10% penalty.

  • This means that if you take out $10,000, you only will be able to pay off about $6,000 worth of debt. If you take out $100,000, you'll end up with about $60,000 leftover to pay debt. That's a huge and unnecessary hit.
  • You lose all the tax-deferred growth on $10,000 or $100,000. When you retire and depending on your age, early withdrawal to pay off debt may mean that you have $20,000, $40,000, or $60,000 - or - $200,000, $400,000, or $600,000 less for your retirement.
  • Money you withdraw and its potential growth will not be available for your retirement and most folks aren't able to work forever. You may become a burden on your children or taxpayers, who fund government programs.
  • You have a legal right (based on the US Constitution) to keep all of your retirement funds, even if you owe others money. In addition, courts have been ruling that inherited IRAs are also protected during bankruptcies and lawsuits.

The same advice holds true for home equity as well. Using your home equity would likely only delay - not prevent - bankruptcy. In addition, home equity is often protected under bankruptcy exemptions and tenancy by the entireties laws, whereas other assets aren't.

Never us your retirement account money or home equity to pay off credit card debt. Doing so is foolish (sorry, we really want to emphasize) and puts you and your family at risk. Please consult with a bankruptcy attorney before you blow through your retirement account and home equity.

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