Borrowing Money From Your 401k Can Be A Costly Mistake

Categories: Bankruptcy Law Overview

You’ve been planning and saving for retirement and doing everything “right” according to the financial gurus.  Then, in 2008 when the economy tanked, you’re now left with a home with no value, credit lines cut-off and closed, and wondering if you’ll even have a job in the next year. Or worse, you’ve just been laid off.  What do you?  First, you immediately consult with a bankruptcy attorney, your tax advisor and financial planner before the first unemployment check arrives. Why?

Because tempting as it is to tap into that nice nest egg you’ve been so diligently building, its sole purpose is for your retirement and unless you’re 65 you don’t want to touch it at all costs. It’s alarming for me to see an increase in 401k loans according to this article,  Loans From 401(k)s Are on the Rise As Investors Tap Their Inner Banker. Besides the income tax consequences in pulling funds from a tax deferred retirement account, its one of the worst financial mistakes you can make that will still land you in bankruptcy.

When you’re faced with declining or non-existent income, you 

FIRST must cut your expenses immediately and consult with your professionals.

SECOND, consider whether this is short term or long term and make your decisions based upon your financial goals and what you have to work with. 

THIRD, create and live by a BUDGET.  Cut expenses and then cut them again. You cannot afford to borrow from your 401k to support the lifestyle you had when you’re working, now that you’re unemployed.  You simply cannot sustain any negative budget.  If you don’t take these necessary steps, you’ll land in my office with no retirement and still needing to file bankruptcy.

the absolute LAST thing you want to do is continue to pay unsecured credit card debts, especially with a 401k loan.

In fact, if you would consider bankruptcy as a powerful tool instead of the last stop to financial freedom from debts, then we could get this economy propped by by spending again. I would much rather see bankruptcy filings on the rise than 401k loans. Be sure to consult with your professionals before making any important financial decisions and do it now to save you from disaster later.

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