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I know it's hard. I know you're desperate. You're stressed and losing sleep. Things are tough. You have to do something, and soon. But whatever you do, don't touch your retirement account. Don't borrow against it. Don't withdraw from it. Leave it alone.

What's so bad about liquidating a retirement account?

Momentum: Even if your retirement account is currently losing value, that's money you are going to need after you reach retirement age. And I can guarantee you are going to need it much worse then than you do now. If you bleed it dry now, you stop the momentum, the pace at which it is growing. Think of your retirement account as completely out of your reach for now.

Penalties: This is huge. The penalty for early withdrawal (before you are 59½ years old) is severe. You will lose 10 percent right off the top. If you don't think that is significant, you are not thinking straight. Calculate how long you would have to work and contribute in the future to make up for this loss.

Taxes: If you think you're losing sleep now, just wait until you owe back taxes on retirement withdrawal. You have to pay income tax (federal and state if you live in a state that taxes income) on the entire amount all at once.

Loss of exemption: A unanimous Supreme Court ruled in 2005 that individual retirement accounts are shielded from the reach of creditors in bankruptcy proceedings, a decision that boosted protections for the nest eggs of millions of people.

That means no matter what happens or how bad things get before you turn the corner and get back to work, creditors can't touch IRAs. More importantly, if, God forbid, you have to file a bankruptcy case, it means the trustee can't touch your retirement account either.

Generally, whether a debtor in a Chapter 7 bankruptcy case is able to keep an asset like a home or vehicle depends on whether the asset is "exempt." Most states provide for specific categories of assets to be exempt. If your state doesn't have its own exemption scheme, debtors there will use the federal exemptions. For example, New Jersey does not have state exemptions, so residents there use the federal exemptions, which do not provide a lot of protection.

No matter how difficult things are right now, cross your retirement account off your list of options. It is out of your reach for now. Then, get busy pursuing every other option that you have.

As difficult as things may be right now or may become in the future, I promise you'll thank me in 10 years.

As always, you should seek counsel from an attorney, tax professional or other qualified professional before making any financial decision with regard to retirement accounts.|Everyday Cheapskate, Box 2099 Cypress, CA 90630


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