Should I take a loan from my retirement plan to repay my debt?

February 22, 2012

This is a question that I am often asked by people with a lot of debt.  There are two very important reasons why borrowing money from your retirement plan is a bad idea.

1)  The money in a 401k or similar retirement plan is completely safe from all your creditors.  No court can force you to repay debts from a retirement plan.  For most of my clients, their retirement may be their only real asset.  Taking your only asset, which could not be touched by creditors, and using that money to pay creditors is generally not a good financial move.

2)  The money that you put into your retirement plan was probably contributed pre-tax (meaning that you didn’t pay tax on that money).  If you borrow money from the plan, the money used to repay that loan is taken after taxes.  Which means that you pay income tax on the money used to repay the loan.  That might seem okay.  Just think though, when you are in your golden years and you draw that money from the retirement account, you will be taxed AGAIN!!!!  In other words, the money used to repay a loan will be taxed twice.  That is a bad deal!

Before you consider touching your retirement account to repay debt, talk to a good bankruptcy lawyer.  Some of the saddest stories I hear are from folks who completely drained their retirement accounts and still needed to file bankruptcy.  Had they met with me first, at least they would still have their retirement money.


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