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Beware of paying off debt with retirement savings

Many Colorado residents spend years building up their retirement savings. Whether they have a 401(k) or other retirement plan, Colorado residents understand the value of these investments and how important it is to contribute to the plans over time to build retirement savings.

Yet, when unexpected life changes arrive, such as a job loss or medical problem, individuals may find themselves in the unfortunate situation of having to decide whether to use their retirement savings to eliminate debt. When these life changes occur, individuals often rack up credit card debt and personal loans, and it can seem impossible to pay off this debt without taking money out of a retirement plan.

Experts strongly advise against using retirement savings to pay off debt, however. While the funds may be available from these accounts, individuals are depleting the retirement savings they spent years building up, as well as the compound returns these funds could generate. Moreover, individuals need to pay back loans against their 401(k) with after-tax dollars, and they must pay additional taxes when they withdraw their savings.

Fortunately, there are other options available to get rid of high debt, including bankruptcy. Instead of losing out on the retirement savings they have worked so hard to accumulate, individuals can enter into a Chapter 13 repayment plan, or a straight bankruptcy under Chapter 7. In either event, individuals' debt can be discharged, with exemptions available to protect certain assets belonging to the person. Accordingly, when individuals face high debt, they should consider all of their options to determine what works best.

Source: CNN Money, "Should you raid your retirement savings to slash debt?," Melanie Hicken, July 11, 2014

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