|
It can be tempting to tap retirement savings—especially if you want to deal with debt—but most financial experts do not recommend accessing retirement money early. Remember, if you withdraw money from your 401(k), you will have to pay tax plus a 10% penalty on any money withdrawn. This total tax bill will probably come to about 37% of the money you withdraw. Even your credit card companies don’t charge an interest rate that high. As an example, if you withdraw $10,000, you will probably realize only $6,300. You will have to pay the other $3,700 in taxes.
Additionally, if you cash in retirement money early, look at the stress you will go through when you are ready to retire but don't have the funds set aside to retire. Let me include an e-mail we received from a consumer who did draw out money from their retirement plan and the consequences they paid.
“We made deals with credit card companies to pay off debts. We found ourselves about $50,000 in debt to credit cards. Not wanting to go bankrupt I took out a retirement plan and paid most of the companies 30 cents on the dollar. Now filling for taxes I am slapped not only for a 10% tax on early withdraw but also the credit card companies have issued 1099 forms for the debt forgiven. Now I owe the IRS over $9000 and the state over $2000. I am forced to file now for bankruptcy. I want to claim insolvent for my past debt but I can't find a solid answer from anyone. Can you help?”
|