When faced with seemingly overwhelming financial problems many people turn to loans from or cash outs of their retirement accounts. This is usually a bad idea for several reasons.
First, you’re gambling with your financial security in retirement. Because your retirement accounts are invested in securities that are (hopefully) growing, removing funds from those accounts removes the base that grows. Unless that money is replaced quickly, over time the gap between what you have and what you would have had had you not cashed out your retirement can grow to tens or even hundreds of thousands of dollars.
Secondly, cashing out a retirement account to pay bills is often putting a band aid on a much larger problem. Unless you address the underlying reasons for needing to access that money the likelihood is that you’ll be back in the same boat in a very short time. Only now you’ve worsened the situation because in addition to owing creditors you owe yourself for the money you cashed out.
Thirdly, you’ve converted exempt assets into non-exempt assets. Retirement accounts are exempt in bankruptcy, meaning the trustee can’t get at them. I once had a client who had over $800,000 in retirement accounts when he filed bankruptcy. The trustee didn’t even blink at the amount on the schedules because the trustee knew he couldn’t get at that money. Had my client removed that money, it would have become non-exempt.
Fourth, if you take an early withdrawal you’re going to be hit with a hefty tax bill. Enough said.
Before giving in to the temptation to access your retirement accounts to catch up on bills, make sure you understand the consequences of doing so.