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Should Tennessee residents use retirement savings to manage debt?

When Tennessee residents are facing bankruptcy they will look at every possible solution to get back on track. For some this might even include looking at retirement savings. In fact, according to a recent study approximately one quarter of all Americans have reached into their retirement savings at one time or another. What many people do not know, however, is that state and federal bankruptcy exemptions include many retirement savings accounts.

For readers unfamiliar with bankruptcy exemptions, the term refers to certain property that is protected from creditors during bankruptcy. The specific exemptions that apply in any given case depend on a variety of factors including the state, whether a person is seeking chapter 7 exemptions or chapter 13 exemptions, and whether the person elects for federal exemptions or state exemptions. Nevertheless, in most cases a 401k will be protected.

In addition to being exempt from bankruptcy there are many other reasons that tapping into retirement savings accounts to manage debt is not a very good idea. For one thing, taking out money early from a retirement savings account via a 401k often costs money. Typically, a person making an early withdrawal from a 401k must pay income tax in addition to a 10 percent penalty. Many other retirement accounts have similar penalties for early withdrawal.

While some companies allow employees to borrow against their 401k's in order to access funds without incurring penalties for early withdrawal, this too comes with risk. For example, if the person is terminated or otherwise loses their job the funds borrowed become due. If the employee is unable to pay back the borrowed money the penalties for early withdrawal are applied. These are just a few of the reasons borrowing from retirement should be done very cautiously.

Source: KARE 11 News, "Knowing about borrowing from your 401k," January 24, 2013

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Mark T. Young & Associates
2895 Northpoint Blvd.
Hixson, TN 37343

Toll Free: 888-376-0282
Phone: 423-933-1606
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