- May 29, 2017
If you’re in a pinch, you may want to sell some of your stuff to help pay down your debts. Liquidating assets means selling anything that can be converted into cash. Assets include large items such as a house or car. They also include things you own like jewelry, antiques, or a 401K retirement account.
Should You Sell?
If you do decide to sell off some assets, you need to carefully consider the impact that will have. If you sell your house, where will you live? If you sell your car, how will you get to work? If you empty your retirement accounts, how will you pay for your needs when you’re older?
If you have some assets that you can do without, how will you get the best price for them? There are lots of ways to sell items these days. You can hold a garage sale. Websites like Craigslist or eBay make it easy to sell things to a global market. If you are selling antiques or jewelry, you can find an auction house or a local dealer with a good reputation. Shop around to make sure you are getting the best price.
Selling off unused items is one thing. But using retirement funds to pay off debt is usually not a desirable option. Don’t sacrifice your long-term retirement savings without first seeking legal advice. There may be penalties and taxes to pay.
If you have a 401K, you have a couple of options. Facing foreclosure because of unemployment or a health problem? You may be able to take a hardship withdrawal. Here, you will have access to your funds and there is often no repayment. But you will pay a penalty of about 10% on the money withdrawn. You will also be using key funds for your retirement.
A loan against your 401K is another option. This can be used for any purpose. The loan payment may be smaller than the monthly payment toward the debt. It may also have a lower interest rate. But if you leave your job for any reason, your loan may become due or be treated as a withdrawal subject to penalty. Also, during the loan period you will lose the potential growth on your retirement funds. Keep in mind that most 401Ks are protected from bankruptcy. Think about your options carefully.
If you have a Roth IRA, you can withdraw funds – generally without penalties. If you only take out what you put into the account, you’re not likely to face fees or taxes. But if the account has grown in value, you may be subject to capital gains taxes.
Pros and Cons
Consider the fees and taxes you’d pay to remove funds from a retirement account. Consider the interest you’re paying on your current debts. Consider the stress they’re causing. Keep all these things in mind when you decide whether to take money out of your retirement accounts.
But also remember why you put that money into those accounts in the first place. To take care of yourself later in life, and to protect your savings with special tax advantages. If you remove money from your retirement accounts to settle pressing debts, will you be able to catch up on retirement savings later? Retirement accounts are usually protected from being tapped into by a bankruptcy court. But by withdrawing your funds, you may remove that protection.
Think it Over!
No matter what assets you’re considering selling, consider carefully. It may be the best decision you can make to settle your debts. Or it could be a costly mistake in the long term.
It May Be Helpful to Talk to a Financial Counselor
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