If you are thinking of using your retirement savings to pay off debt, you may want to consider the risks. It may seem like an easy choice, but it could result in working longer and harder to make up for the withdrawal. Here are some reasons why you shouldn’t use your retirement savings to pay off outstanding debt, and other alternatives to consider.
You will have to pay penalty fees and taxes.
If you withdraw money from your retirement account before the age of 59 ½, you will have to pay fees of anywhere from 10% to 25% on the amount you withdraw. On top of that, your withdrawal is subject to income tax, potentially reducing your savings significantly. Withdrawing from your savings may help you pay off your debt, but it can also leave you with little to no funds when it’s time to retire.
You put your retirement fund at risk and lose growth.
It is important to separate your retirement account from your emergency funds. When you take money from your retirement account, you risk your ability to live comfortably after you finish working and are no longer on a steady income. You also lose the growth you have made over the years through annual interest. In the end, you will likely have to work longer and harder because you touched your retirement funds too early.
You have to start over rebuilding your savings.
Another downfall of using your retirement savings to pay off debt is that you will have to start over to rebuild them. This can become a problem due to the limits on how much you can contribute to your retirement each year. If you saved up for 20 years and spent it at the age of 45, you will likely have to work much longer than anticipated to rebuild your retirement funds.
Alternatives
While it is best to leave your retirement fund untouched, paying off debt can be difficult. There are other options to debt relief, including:
- Creating a repayment plan can give you a budget to work with, so you can allocate your income to cover expenses and work on repaying debt overtime. It could also be beneficial to discuss your options with a financial professional who can create a plan for your specific situation.
- Negotiating with creditors can give you the opportunity to discuss repayment plans and lower interest rates. This may not be a viable option if the interest rates continue to be so high as you may not be able to pay enough to cover the accruing interest.
- Finding ways to increase your income, including part-time work, selling items, or freelancing.
- Filing for bankruptcy can help eliminate debt and give you a fresh start. We understand that this may not be the last resort for some people, however it may be the smartest choice for eliminating debt and starting over.
If you are not sure that bankruptcy is right for you, we encourage you to speak with a bankruptcy attorney. Call Craft Law Offices to schedule your free consultation today and let Leslie Craft answer all your questions, address your concerns, and help put you on a journey to financial freedom. Contact Craft Law Offices today at 252-752-0297.