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Never use your retirement accounts to pay off mortgage loans
You have an unbearable debt and don’t want to file for bankruptcy. But you also don’t want to approach a credit-counseling center because you know exactly how to repay your debt – withdraw the money in your individual retirement accounts (IRA) and pay off your loans. This would mean a dent in your retirement funds, but only a small one.
If you really think so, then the first thing you need to do is rush to a credit counselor, or somebody who’ll tell you that such an act would not only be self-defeating, it could make you lose some good money! The choice of using your IRA funds actually should not exist on your list of options to repay loans.
Imagine if you’ve deferred payment, then the taxes and penalties will be quite high. So, when you account for all these penalties and taxes, you may be forced to withdraw much more than you actually intended to.
And the biggest problem with trying to withdraw from your IRA is that you’ll lose your future tax-deferred returns. This means that if you withdraw something as paltry as $1,000, it could cost you over $10,000 in lost retirement income at a rate of 8% per annum or in other words, over 30-35 years, you would have lost nearly $1 million in future income! A better option would be to examine your accounts and find ways to trim unnecessary expenses.
Firstly, if your debt burden is too high, don’t try to sort out your financial affairs alone. You need professional help and quick. So quit dilly-dallying. But before you meet with your counselor, you could sit down and do some stock taking to know where exactly you’ve gone wrong in managing your money. Once you identify the problem areas, you’ve won half the battle. Now it is only a matter of time before you and your counselor chalk out a plan to ensure that you are back on track at the earliest possible.
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