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Using Retirement Funds to Pay Debt
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Taking money, either in the form of a withdrawal or a loan, from your retirement savings such as an IRA, 401k, 403b, whole life insurance or other retirement savings plan.
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Pros
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You are borrowing only from 'yourself' to pay off debt.
Cons
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You will incur penalties for early withdrawal from most forms of retirement
savings. This usually means that you will owe taxes for the year in which
you withdraw funds.
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If you take a loan rather than a withdrawal, your company will deduct the
payments for this loan from your paycheck and this may leave you with too
little money, causing you to increase your debt.
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If you cannot repay a retirement loan, it is then considered a withdrawal,
with the same tax penalties associated with an early withdrawal.
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Any funds taken now and not repaid will reduce your retirement savings.
What to Avoid
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Avoid leaving yourself with too little money in your paycheck due to retirement
loan repayments.
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Avoid incurring tax penalties since these are new debts you will have to
pay.
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Avoid taking this step unless you know all of the consequences and are certain
that this step will take care of all of your debt problems.
What to Look for
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Look for a source of retirement savings that you can liquidate without incurring
tax penalties for early withdrawal.
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