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Too many Americans raiding retirement funds to avoid bankruptcy

Many of our Memphis readers may try to do anything to avoid filing for bankruptcy. But a new study by a financial adviser firm shows that too many Americans are doing something that they should not be doing to try and manage their debts: withdrawing money from their retirement funds.

According to the study, one-fourth of Americans are using their retirement funds to stay current on their bills. Some people may feel that dipping into their 401(k) is a smart strategy to reduce their mounting debt, but taking money out before you hit retirement age could leave you exposed to high taxes and early withdrawal penalties.

The amount of money that Americans are taking from their retirement accounts to pay bills amounts to $70 billion each year in lost retirement income. And that is money that may not be there when you hit retirement age.

Many Americans may think it's better to raid their retirement accounts than to seek bankruptcy protection. But that is likely not the case when it comes to mounting debt. The money in retirement accounts is protected from creditors if you go through bankruptcy, so you will not lose your nest egg.

In fact, if you are close to retirement age and you are thinking about withdrawing money, think again. You may get up to date on your bills, but you may have to put off retirement because you don't have enough saved up anymore. It may be better to declare bankruptcy and get through it. After all, it could provide you with the fresh financial start you need to face your retirement confidently.

Source: CNBC, "More Americans Raid Their 401(k)s to Pay Bills," Chris Jansing, Jan. 16, 2013

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