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Four Reasons to Never Use Your 401(k) to Pay Down Your Personal Debts

If you are facing debt and you have money in a 401(k), it might seem to make perfect sense to use money from your retirement account to pay down your debts. Unfortunately, this is almost never a good idea. Keep reading to learn four reasons we do not recommend this. Then contact The Law Offices of Paul Y. Lee at 888-748-0025 for a free bankruptcy consultation.

  1. It Costs More Than You Think
  2. Most people who decide to take money from their retirement to pay off debts do so because they look at the difference in interest rates. They see that they’re paying 20% interest on their credit card and only earning 5% on their retirement account. It might seem clear that you actually make money by getting rid of the high-interest credit card s but that is not always the case. Why? Because the money in your retirement account is compounding. Even if it takes you a decade to pay off your credit cards, remember that your 401(k) is likely to keep working to make you money for 35 years or more.
  3. You’re Risking Your Future
  4. If you are far from your retirement age and you have “plenty” to spare in your 401(k), you might think it makes sense. If 2020 has taught us anything, it has taught us that the future often does not hold what we expect it to. Taking money out of your retirement account is a gamble no matter how you look at it, and you could end up paying big in the future.
  5. Creditors Cannot Touch Your 401(k)
  6. If it was possible for creditors to come in and take money out of your retirement to pay your debts, then it might make sense to take out a loan. This is not the case. Yes, if your debt becomes serious enough and you are enough in arrears, you could face lawsuits, you could lose your home, and you could lose money in bank accounts. Your 401(k) is protected and cannot be taken – even in bankruptcy.
  7. There is Likely a Better Option
  8. Finally, consider that there are many answers to your financial issues and taking money out of your 401(k) is not likely to be one. If you are like most people, doing this would just end up being a quick fix that does not result in long-term solutions.

The better option for many people is to file for bankruptcy. This can be a permanent solution to your money problems that allows you to move forward without losing everything. To find out if you are a good candidate, and how it could help in your particular situation, contact The Law Offices of Paul Y. Lee at 888-748-0025 to request a free legal consultation.