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Avoid using retirement accounts to pay off debt

Residents in Wisconsin who have large amounts of debt may consider taking money out of their 401(k) retirement accounts to pay off their creditors. While this may seem like a quick and easy way to eliminate credit card debt, there are a number of downsides to taking money out of a retirement account. Additionally, if someone does not deal with the behavior that led them to accumulating large amounts of debt, they could end up worse off than when they started.

There are two main issues with pulling money out of a 401(k) before someone reaches the age of 59. The first problem is that fees and taxes will take a chunk of money out of what is available. An average of 30 to 40 percent of the money someone takes out of a 401(k) will go to taxes and fees, so removing $25,000 from an account will only leave someone with $16,250 to pay off their debts. Additionally, once the money is removed from the account, people are no longer benefiting from interest on that money being added to their account.

Another major issue with taking money out of a 401(k) to pay off debts is that if someone has a habit of overspending, they may end up paying off their debts, only to go into debt again. This leaves someone with little to no money for retirement and a large amount of debt.

Those struggling financially may benefit from filing for bankruptcy. An bankruptcy attorney may be able to help someone understand what bankruptcy could do for them and what is involved in the filing process.

Source: Post Crescent, "Alan Prahl column: Weigh options before tapping 401(k) to pay debt", Alan Prahl, June 07, 2013

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