Why borrowing against your 401k is not a good idea

If you are struggling to pay your bills, taking a loan against your 401k or taking any money out of a retirement accounts is not a good idea for two main reasons.

The first reason is practical – if you take money out of your 401k now, you will see tax penalties later if you have not reached the necessary age. Because most people don’t set aside the money to pay the taxes on the 401k withdrawal, you could see a pretty big problem come tax time when you have to pay the tax penalty.  

The second reason taking a loan against your 401k is a bad idea is because under the bankruptcy code, your 401k or IRA is 100% protected from creditors. That means that a creditor, even if they get a judgment against you, could never touch that money. Think of that money as locked away in a secret vault that only you have access to. But when you take that money out of your 401k, that money is no longer in the secret vault and now creditors can access it. If a creditor has tried to garnish your bank account, by taking a loan against your 401k and placing that money in your bank account, you could just be handing over that money straight to the creditor.

If you are struggling to pay your bills, reach out to an experienced bankruptcy attorney for a consultation. There may be options for you to reduce your debt and keep your retirement money safe.

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