If you have found yourself in the position that many American's face today of possibly having to file for bankruptcy protection, then there are certain financial decisions things that you need to make, and many perilous mistakes that you need to avoid. One of the biggest mistakes that people make when they are facing financial hardship is to prematurely dip into their retirement funds.
Filing for bankruptcy should be looked at as a last resort for most people. In doing such, it is often easy to tap into your retirement accounts to make ends meet. However, when a person is facing the potential need to file for bankruptcy, their financial future is often extremely uncertain without knowing how much money or time it will take until their affairs are back on track. Withdrawing your funds prior to retirement age is a slippery slope, one in which it is easy for a person to justify, "just one more month..." or "I will repay the loan later."
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There are three primary reasons why it is important to not raid your retirement accounts prior to your true retirement. The most obvious is that they are there for a purpose, and that is to support your lifestyle once you no longer have income from your primary profession. If you look at the effects of compounding interest it becomes even more important to keep your money inside of these plans for as long as possible to ensure you are adequately covered during your golden years.
Another issue with early withdrawal of retirement accounts can be a heavy tax burden. Depending on what type of plan you have or how it is set up, you could face a 10% Federal Income Tax penalty along with having the amount taken out taxed at ordinary income. If this money is inside an insurance annuity you might also face a penalty from your insurance company. Before taking any money out of your plans it is wise to speak with your tax attorney or CPA along with any financial planner that you are working with.
One of the largest benefits that most retirement plans offer is that they are creditor proof and judgment proof. This means that in most qualified retirement accounts your money will be left out of any bankruptcy proceeding or lawsuit. Once you take this money out of the qualified plan, it will not be protected and subjected to the bankruptcy process.
With unemployment staying at record highs and no end in sight to the economic status of our country, bankruptcy filings are a common place. Several years ago most people did not know a single person who was forced to use the bankruptcy laws to get their financial situation back on track. This is not the case today. If there is any chance that a bankruptcy is in your future, it is imperative that you seek the guidance of a bankruptcy attorney as soon as possible. They will be able to help you determine what actions you need to take right away, and possibly more importantly what actions you need to avoid.
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