If you are struggling with debt, you may be feeling overwhelmed. It may seem hopeless to keep making small payments to chip away at a large balance.
This is especially difficult if you are sitting on a significant sum of money, like your retirement account. Wouldn’t it be easier to erase the debt with all its interest and rebuild the retirement funds instead?
Not so fast. While this solution may seem simple on the surface, it can have deeper consequences that aren’t visible today.
1. Retirement accounts build slowly
Retirement accounts take a long time to build up. Therefore, if you drain this account, you will have to rebuild it at the same speed, starting at zero again.
It may seem like a lot of money right now, but that account is intended to be your only income someday. While Social Security could be available, it is worth asking yourself if Social Security alone will be enough to support you. In most cases, it's not.
2. Draining accounts can cause tax problems
Most retirement accounts use pre-tax dollars, with the intention that the recipient will be paying the government when they access those funds during retirement. Draining these accounts before it's time to retire could lead to serious tax consequences, which could make your debt problems worse.
3. Retirement funds may not save you from bankruptcy
The money in your retirement account could reduce some of the debt, but it’s often not enough to eliminate your debt. If you end up filing bankruptcy, retirement accounts are protected and your future stays secure. If you drain your retirement account and file bankruptcy anyway, you’ve lost that nest egg.
While there are many nonbankruptcy options you can consider that can provide debt relief, using a retirement account is not one of them. You can also consider bankruptcy after debunking common myths about the process.