Credit repair is an admirable goal, but achieving it can be frustrating when you are short on cash. High unemployment rates and the cost of living have left many families in immediate financial trouble. It may be tempting to dip into your long-term investments to temper the sting of short-term problems. Think twice before touching your retirement accounts, however. Your attempt to fix credit issues today could result in bigger problems 10 years from now. Dipping into retirement will almost certainly affect:
1. Taxes and penalties.
Withdrawing a few thousand dollars for credit repair may come with a heftier price tag. Many investments are subject to taxation the moment the money is withdrawn. For those who invested post-tax dollars, your money isn’t out of the woods, either. The majority of retirement accounts are subject to age restrictions, forcing you to pay a penalty for withdrawing the funds early. Consider your credit repair urgency against these unnecessary expenses.
2. Growth potential.
You may be thinking, “I’ll fix credit problems today and will have more to invest in the future.” A valid point, but not at the expense of your current savings. When it comes to retirement, time is money. Disrupting decades’ worth of growth potential will only set you up for financial problems down the road. Allow compounding interest to work for you. Look for alternative credit repair solutions.
3. Bankruptcy protection.
Sacrificing your retirement accounts for credit repair may be, according to the justice system, entirely unnecessary. Qualifying funds are usually exempt from bankruptcy proceedings, allowing you to keep your Golden Year plans despite your credit repair woes. Take this act of goodwill to heart and find another way to fix your credit.
4. Creditor protection.
Speaking of protection, you may need some if you’re resolving problems with creditors. Retirement accounts are protected from creditor collections and court-mandated seizures or garnishments. Savings accounts are not so lucky. Effective credit repair involves communication.
5. Future risk.
Credit repair may seem like an insurmountable task today, but what about the challenges of tomorrow? The good news about your current financial troubles? Management through knowledge. For example, you know how much money you earn. You also know how much your bills cost and what your creditors expect from you. The future is filled with all sorts of poignantly unknown x factors. Two things are certain, however: you will be older, and inflation will be higher. When faced with these facts, why risk your retirement safety? Take advantage of the options you have now and work to fix credit problems without putting your older self at greater risk. An empty 401k is not the answer.