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One of the things we caution people about is taking money out of a retirement account to keep a business afloat. Often, an entrepreneur has that desire, that need, and that confidence to do whatever it takes to stay afloat. ‘If we can just get around this corner it’ll be ok.’ We get that. The problem is, of course, that as bankruptcy attorneys, what we see are the train wrecks. And over the last several years there have been many of those!

The consequences of that are many. First of all, it’s not a wise thing to do because when you file a bankruptcy, your retirement account is protected. Nobody can touch that, not even a bankruptcy trustee. If you take the money out of your retirement account, it is not protected. If you spend it trying to keep a business afloat, and it ends up going down a black hole, now you really have a problem because that withdrawal is now going to result in a tax liability. When you take money out, that is deemed to be income to you and that is not dischargeable in bankruptcy, at least not for a few years.

So, think twice and consult a professional before taking money out of a retirement account to catch up on business bills. And PLEASE don’t drain it entirely! Too many people have drained their retirement completely and that’s such a sad story because they come out with $0, in a deep financial hole, because they now also have a tax bill. We can help you avoid those consequences and we’ll be happy to consult as needed along the way without forcing you into bankruptcy. And if there are other ways to deal with your debt, we can do that too.

We just want you to think about this before you make a decision about dipping into your retirement.

Clint W. Smith, P.C.

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