Never use a 401(k) to pay off debt

The number of people 65 and older that have filed bankruptcy has tripled since 1991. Those struggling with debt often tap into their 401(k) to pay it down, in an effort to pay their bills and to not have to file bankruptcy. Here’s what you need to know if you find yourself in this position. 
Funds in your 401(k) and IRA’s are protected in bankruptcy by federal law. So even if most of your assets are seized to repay your creditors, your retirement account is considered exempt and can’t be touched.
 The exemption of 401(k)s in bankruptcy started with the Employee Retirement Income Security Act of 1974, a federal law that sets minimum standards of protection for individuals who voluntarily contribute to retirement accounts and healthcare plans in the private sector. 
The special thing about a 401(k) is that it isn’t considered property of the [bankruptcy] estate. But if you transfer any or all of your 401(k) out your employer-sponsored account and into your regular checking or savings account, that money is no longer protected. Not only do you lose your retirement savings when you tap your 401(k) to pay down debt, but you also have penalties if you’re under age 59½. Outside of certain limited circumstances, the IRS imposes a 10% early-withdrawal penalty on funds in a traditional 401(k) withdrawn before that age, on top of the ordinary income taxes that you owe on the money you take out.  
If you have questions call 320-679-5183.