Many Jeopardize Future Financial Security by Borrowing From 401ks

Saving for retirement is something that most people are aware they need to do. However, in the recession that has gripped the U.S. since 2008, many have found it difficult just to make ends meet, let alone put away money for the future. Some people have found themselves in circumstances where they needed to use the money they had saved for retirement for current expenses. However, doing so can lead to more problems than it solves. People should be aware of the difficulties that can arise from borrowing from 401k accounts and how bankruptcy might be a better option for those struggling financially.

Undermining retirement

Financial experts have already sounded the alarm about the rate that people in the U.S. save for retirement. According to an Employee Benefits Research report issued in March 2013, 57 percent of workers reported having less than $25,000 in retirement savings. In comparison, only 49 percent of employees in 2008 reported having so little saved. Economists noted that young workers are particularly vulnerable with respect to retirement savings, as the economic downturn has prompted many employers to reduce pension benefits and delayed many people from beginning careers because they cannot find jobs.

Many have begun to make the problem worse for themselves by borrowing money from their 401k accounts. A report by financial advisory firm HelloWallet revealed that one in four workers have raided retirement savings to pay bills such as mortgages and credit card debts. The report showed that one-third of those who use retirement savings for bills have taken the money from 401k accounts.

Problems with borrowing from 401ks

People may believe that it will not harm them to “borrow” from 401k accounts to pay pressing bills now, believing they can repay the money at a later date when finances are not so tight. While borrowing from these accounts, rather than straight withdrawals, avoids having to pay taxes on the money initially, if people find out they cannot repay the money they will have to pay taxes on it later.

Additionally, once a person removes money from a 401k and puts it into a normal bank account, the funds are no longer exempt from creditor collection actions like they were when they were retirement funds. Creditors may try to seize the funds after withdrawal from the 401k.

Finally, when the money is not in the 401k account, it is not earning interest and growth for the future.

Bankruptcy may be an alternative

Those who feel overwhelmed by debt may find filing bankruptcy is a better option than using retirement savings for debts. People may keep all of their retirement funds when filing bankruptcy, as well as many other possessions – all while the automatic stay that accompanies a bankruptcy petition prevents creditors from instituting collection actions. Some people have used bankruptcy as a way to prevent foreclosure and become current in their mortgage payments. After filing bankruptcy, most or all of a person’s unsecured debts are discharged, and he or she can make a fresh financial start.

If you are struggling to pay your bills, speak with an experienced debt relief attorney who can inform you of your options.