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Should you tap retirement funds early to pay off debts?

On Behalf of | Jun 8, 2021 | Firm News

If you are carrying overwhelming debt, you may be considering pulling funds from your retirement savings. That may be especially true if you hope to have many years of work ahead.

However, doing so may hurt your overall financial health in both the short and long term. In addition to paying a potentially sizeable tax penalty on early withdrawals, you may be putting your own future at risk if you do not have enough savings when you do need to retire.

Before tapping funds you may need later in life, you should know that most retirement accounts are exempt under either Chapter 7 or Chapter 13 bankruptcy.

Retirement and pension plans that may be exempt

North Carolina law protects many types of retirement and pension accounts during bankruptcy. In addition to tax-exempt plans such as a 401(k), 403(b) or simple IRA, your pension benefits may be exempt if you are a:

  • Municipal, city, county or state employee
  • Law enforcement officer, firefighter or rescue worker
  • Teacher

Tapping retirement vs. filing for bankruptcy

If you are like many Americans, you may worry that bankruptcy will mean losing everything. This is often far from the case. In addition to your retirement and pension funds, you may be able to keep much or even all your property under either Chapter 7 or Chapter 13. This may include your vehicle, personal belongings, professional tools and equity in your home.

You have worked hard to build your retirement savings. By eliminating or restructuring your debt through bankruptcy, you may be able to get a fresh financial start without compromising valuable retirement assets you may need in the future.

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