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Using 401(k) funds to pay off debt may not have desired results

Having substantial debt can affect anyone during his or her life. If you have accrued a debt amount that has made your life more difficult, you may wonder how you could potentially address the outstanding balances in hopes of bettering your financial situation. Though various ideas may come to mind, you may wish to remember that certain tactics could potentially make your situation worse rather than giving you the reprieve for which you had hoped.

For instance, you may consider dipping into your retirement account in order to use those funds to address your debt. However, this action may not have the desired results for a variety of reasons.

Penalties

In most cases, if you withdraw funds from a 401(k) before retirement, you can face a multitude of penalties and taxes. As a result, you may think that a certain amount of money will cover your debt, but in order to address those penalties and taxes, you will likely need to withdraw additional funds. You could potentially end up outing yourself more money than necessary by attempting to obtain those funds early.

Missed growth

Because money in a retirement account accrues interest, withdrawing the funds early could also mean you miss out on future financial growth. Understandably, thinking of future benefits when you need money now can prove difficult. However, taking this factor into consideration could prevent missing out on thousands of dollars by the time retirement comes around.

401(k) loans

You may have also heard of a 401(k) loan. If you have access to this option, you could potentially borrow money from your account early with the obligation of paying the money back with interest. Though you could avoid the previously mentioned penalties with such a loan, those penalties and taxes would apply if you fail to pay the money back, and again, you could potentially make your financial situation worse.

Debt relief

When debt becomes considerably overwhelming, you may wish to consider relief options. Though you may think that avoiding bankruptcy at all costs is your best bet, moving forward with this avenue could actually prove beneficial. Rather than risking the possibility of making matters more difficult for yourself, you may want to give Chapter 7 bankruptcy due consideration.

Of course, having the right information could help you better determine whether this route could fit your needs. Discussing your options with an experienced DC attorney could allow you to gain reliable insight into how bankruptcy could affect your circumstances.

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