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Planning to dip into your retirement savings to pay down debt?

Ten years ago, the U.S. experienced a recession that some suggest mirrored the Great Depression. The financial market collapsed, home prices tanked and people were laid off from their jobs.

Employees turned to their pensions and 401(k)s for financial relief in hopes of getting through the “temporary” hardship. In fact, according to information provided by the IRS, the U.S. took out $50 billion in early retirement withdraws in 2011 alone.

Sadly, the temporary loan turned out to be permanent for many people and many found themselves in worse financial shape than before they borrowed. Fast forward to today, and many people still turn to 401(k) loans for debt relief. They too are finding out that using these funds is not the best financial move. But why?

Tax penalties

U.S. tax law stipulates that borrowers under the age of 59½ who take out money from a retirement account without paying it back within 5 years must also pay a 10 percent tax penalty on that amount. They also must declare the amount and pay the obligatory income tax associated with it as well.

Many who initially borrow do so with the intent of using the money as a short term loan with plans to pay it back so they can avoid these penalties. However, this rarely occurs; many who turn to 401(k)s for financial relief are already knee deep in debt.

As a result, borrowers default-and get stuck answering to Uncle Sam. Instead of a healthy nest egg to get them through their mature years, they now owe money.

Lack of assistance

The federal government is seemingly aware of the problem. Stagnant wages coupled with loss of thousands of jobs over the past 10 years has increased the number of early retirement withdrawals. Retirement penalty fee waivers and other proposals were introduced in years past by Congress, but to no avail.

Today, the economy has improved but it is not prospering like it was pre-recession. U.S. jobs simply aren’t paying enough to keep up with the cost of inflation. People are finding themselves with high credit card balances and other loans they cannot pay back.

Turning to a debt professional

If you’re struggling to pay down debt and are thinking about borrowing from your retirement account to help ease financial strains, consulting with a bankruptcy attorney first before taking action is advised.

A debt consultant professional can talk with you about your situation and whether filing for bankruptcy is a better option. A bankruptcy attorney can also explain the process in greater detail and dispel common bankruptcy myths that often hold back people from taking such a big step.