Never Drain Your 401K or IRA

Posted over 2 years ago. 1 helpful vote


Over the last few decades we have seen an alarming number of people that are in financial difficulty drain or cash in their 401K or IRA. STOP!

Their theory is always the same: it is easy money to get a hold of and it will pull me out of debt. A year later they are in my office still in debt and with no retirement savings and often a tax issue.

Never cash these assets in before consulting with a bankruptcy attorney in your jurisdiction. Why? In most jurisdictions these assets are exempt in bankruptcy. This means you could have $300.000 in a 401K, and owe $120,000 in medical bills and credit cards, file your bankruptcy and eliminate your debt and keep your entire investment. This makes sense since some day you will retire and need the funds.

Too many people liquidate these investments and can never build them us again. We see many people liquidate and still can't pay all their debts so they lose the investment and are still hounded by creditors.

Taxes and Penalties: There is also a loss of some of your investment if you cash it out early. You end up paying taxes on the money and a heafty penalty for early withdrawl.

Bottom Line: Never Never Never cash these in for financial reasons until you have spoken with a competent bankruptcy attorney licensed in the state in which you reside.

Additional Resources

Nolo has a small article on this idea that whould reinforce what has been said here.

Nolo Bankruptcy

Adams Law Group

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Related Topics


Bankruptcy is a legal way for people or businesses who are no longer capable of paying back their bills to clear these debts and start over.

Employee 401k plans

Employee 401k plans are common retirement benefits. Employers may match a percentage of employee contributions to the plan to encourage retirement saving.

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