Chicago is an expensive place to live. Even when you have what’s considered a good income, you’re still living paycheck to paycheck with a bit of credit card debt on the side. For most of us, savings is a luxury that’s unaffordable. But if we do save something, it’s usually a retirement account… 401k, 403b, IRA, etc.
So when our income decreases through a job loss, reduction in hours, or retirement, many of us panic as we can no longer afford the minimum payments on our credit cards. Panic clouds our judgment and we make the biggest mistake of our lives: we wipe out our retirement account to pay our credit cards.
At first it seems like the right decision, but then you realize the irreversible consequences of your actions…. You may never be able to retire and your family’s safety net is gone forever.
If you’re asking: Should I cash out my 401k or IRA to pay credit card debt, consider the below reasons never to touch your retirement account. Then read the stories of Stanley and Joselito. Had they filed bankruptcy, instead of wiping out their retirement accounts, they would now be enjoying the good life.


In general, as long as your money is in a retirement account (401k, 403b, Pension, IRA, Roth IRA, etc.), it’s completely safe from your creditors. They can’t touch it, freeze it, or force you to withdraw it.
It does not matter how much you owe the creditor, be it ten dollars or ten million. It doesn’t matter what is the cause of the debt, be it for a credit card, a car accident, or wrongful death lawsuit. It doesn’t even matter if the creditor has sued you and has a judgment. Your retirement account is still protected.
While there are limits to how much money you can protect (slightly higher than $1 million) and some exceptions to the above rule (ex. inherited retirement accounts may not always be protected), 99% of retirement accounts I have come across have these iron-clad protections.
It’s only once you take money out of a retirement account that it can be touched by your creditors. So money in a retirement account is protected, but money outside of a retirement account does not have these protections.
That’s why if you have debt it’s important to first file a bankruptcy before you take out any money from your retirement account. In this way, you wipe out your debt, and safeguard your golden years.


Retirement accounts were created to encourage you to save for one thing: Retirement. As a result, the law rewards those who put money into their account and punishes those who take money out of their account before the normal age of retirement (59 ½).
The reward you get for contributing to your IRA, 401k or 403b is that you don’t pay income taxes on the money you put into a retirement account. That’s wonderful news because it often means that if you contribute to your retirement, you also get a larger tax refund. So you get rewarded both now and later!
On the flip side, the law has penalties for withdrawing money from these accounts before the age of 59 ½. Thus, in most cases, those who take early withdrawals pay both income taxes and a 10% penalty.
These taxes and penalties lead to a series of shocks for those who raid their retirement account to pay credit card debt. First, because a large amount of money is taken out from the retirement account at one time, which is now treated as income, you are now in a higher tax bracket and have a huge tax bill.
Second, because so much money is taken by taxes and penalties, often you can’t afford to pay off the credit cards in full and still have debt. Then there’s the biggest shock when you realize you can never afford to retire because you wasted your retirement account and have none left.
So taking money out of your retirement account to pay credit card debt is literally like burning money and your dream of retirement at the same time.


Congress created retirement accounts out of necessity and not out of the kindness of their hearts. They knew very well that living solely on Social Security is nearly impossible and is getting harder every year.
Have you ever looked to see how much is the average Social Security check? In 2014, it was $1,294.00 per month. That’s just $321.50 above 2014 poverty levels. Want to retire in poverty?
More importantly, $1,294.00 is the average, meaning your payment may be less. Even if you’re lucky enough to get the average, what does that buy? In Chicago, $1,294.00 will barely pay rent. How will you afford food, medicine, health insurance, cloths, gas, electricity, etc? Will you go without these things?
But imagine that you set aside money into a retirement account and didn’t touch it to pay your credit cards. Could you live on the $1,294.00 in Social Security plus $1,500.00 from your retirement account each month? Sounds doable to me. Set aside more and you may be able to afford a yearly vacation!


Stanley went straight from high school to a major company where he worked for over 20 years. While Stanley wasn’t ever able to save much money and had credit card debt, he always made it a priority to put aside at least enough to get the employer match for his 401k.
Then one day he was laid off without any notice. His company had been sold and shipped overseas. He started to receive unemployment, but that was barely enough to pay rent, food and utilities. It certainly didn’t leave anything to cover even his minimum credit card payments.
Stanley believed he would get a job “any day now.” As a result, he didn’t consider bankruptcy and instead withdrew money from his retirement account to keep current on his credit cards.
But almost two years later Stanley was still unemployed. He had exhausted his unemployment benefits; wiped out his retirement account; and still had almost $23,000 in credit card debt. His two years of payments had barely made a dent in his debt. All they did was wipe out his safety net.
Without a penny, he had to move back in with his elderly parents and rely on their generosity. While Stanley will eventually find work, he may never be able to save up enough to retire. Had he only filed for bankruptcy instead, he may soon have been on a beach instead of in a cubicle.


Joselito did what he was supposed to do when it came to his retirement. Every paycheck he contributed a set amount to his 401k and let it grow. After 30 years, he built a retirement account of almost $95,000.
But the second he retired he panicked, because over the years he had accumulated credit card debt. Sure he was able to pay the minimums when he was working, but he was no longer able to do so when his income went down in retirement.
Instead of filing for bankruptcy, he took out the full $95,000 in one year and used almost all of it to try to pay down his debt. That’s when the real problems began.
Joselito’s monthly Social Security income was so low, he was unable to make ends meet without his 401k account. As a result, he now began to take on credit card debt. Soon he was 2 months behind on his mortgage; had to take out a title loan on his once paid off car; and, was again deeply in debt.
So he filed bankruptcy. He did so, because almost two years after retiring, he now had to go back to work and could not afford to have his wages garnished. He too should currently be on a beach after 30 years of hard work. But he can’t because he blew his 401k on debt. That’s tragic.


Retirement accounts were created to help you retire, not to pay credit card debt. If you find yourself unable to pay your debt because of a job loss, retirement, or other reduction in income, don’t take any money out of your retirement account before we discuss your options.
Remember that the decision you make today can affect the rest of your life. You may never get another chance to save for your retirement. So don’t panic, plan with your head. You’ll thank yourself someday.
(N.B. Stanley & Joselito’s names have been changed to protect their privacy.)