Americans are well known for their infatuation with debt and their inability to save.
However, there have been two places that Americans have managed to save to accumulate wealth. 
- The first is their primary residence, their home (believe it or not).
- The second is in retirement plans such as IRA and 401Ks.
The primary reasons these investment vehicles have been successful amongst the free spending is that they are both forced savings plans. People will pay their mortgage first. Before any bills. If you have a fixed rate mortgage , principal will accrue and likely offer a nice savings nest egg down the road.
The retirement plans/IRA also are often pre-tax withdrawals prior to receiving your after-tax paychecks. Again, a forced savings.
Amidst these surviving opportunities to save money for later in life is a growing problem that is happening much too often.
Americans who are facing difficult financial situations are pillaging both these valuable resources. Now, there are circumstances that require a move to empty a 401K or get a (HELOC) /Home equity line. Though, these are last resorts. And, sadly, more and more frequently, people are taking on new debt (yes, these are loans) to pay other debt.
The problem with taking from a Home Equity Line is that you rarely pay off the debt. Most hope to sell their home at some point in the future. However, debt accumulates quickly. Also, you are paying interest (more than 7%) on your own money. If your home grows at historical rates, you are just breaking even; not at all saving for the future.
Taking money from an retirement account poses a whole new set of issues. There are serious tax implications for early withdrawal distributions that you must be aware.
These tax issues need to be explained by a CPA only!
Also, and most dangerously, it is very rare that someone every repays their IRA or 401K. Typically, if you need money for financial hardship, you rarely pay it back in a lump or installments. Ultimately, that money is not working for you over the years and you will pay the price when you need that money down the road.
When people are struggling the predators come out with promises and untold offers to reduce debt and offer debt consolidation.
It may sound callous. However, Yes, I do mean to scare you.
Be careful these are the last 2 options are taking on more debt from your home equity lines or borrow money from your IRA's / 401k's to pay off other debt.
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Copyright © James Wexler * Borrow from IRA to pay off Debt ?? Bad Idea! *
Contact James Wexler (480) 221-8080 for your Phoenix AZ | Scottsdale AZ Real Estate needs
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Do Not, I repeat , Do Not, take money out of a retirement vehicle like a IRA to pay off debt. I am not an accoountant, but you only need to know that taking an asset and paying taxes on that to pay off debt so you can get more debt is a generally a bad idea
Jason - that is good advice .
That money is for retirement. If there is a serious emergency is one thing. But never use it to buy down debt so you can qualify to take more debt
I dont even like my clients to take money out of the 401K for a down payment on a home. If you dont have emergency savings, and an IRA savings, then you dont have money for a home.
PrimeTime - that is good , sound financial advice.
When I was in financial planning, we called that the financial pyramid. usually, insurance , is the 3rd and then the home is the 4th.
Of course, it varies person to person depending on family status, but the same idea.
You should never use existing assets to pay off debt! I understatnd the need to improve debt ratio's to qualify for a mortgage but the answer is not to deplete the existing assets! Debt settlement is the most viable choice...it offers the maximum amount in savings with the shortest term impact to the fico scores! (Depending on the term of the settlement contract and how motivated the client is) On average we can save our clients upwards of 60% off their existing balances. They can truly become debt free! As their debt is paid off, their debt ratio's improve. I believe it is the responsibility of all of us, in any related industry, who have the expertise and experience that the average consumer is lacking, to educate and explore all the options out there! In the current economy it has become more crucial than ever before to teach the public to alter their spending and saving habits...We at Global Families First have implemented free workshops available to all our clients to learn strategies and techniques to change current spending habits... The ever changing underwriting guidelines demand a marked change in societies views on the use of credit...
Global Families - I am going to quote you " You should never use existing assets to pay off debt!" , thanks for taking the time to write such well thought out and articulate comment
Actually pay through debt consolidation one of the easiest way to say goodbye to debt. In best debt management program, it will recommend you from all the debt with lilt advisory.best debt management program
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