When should you take an early withdrawal from a retirement account?
If you need to do that to buy groceries and keep the utilities on — then, you have to do what you have to do to take care of yourself and your kids. All too often, though, I see people take huge withdrawals from their retirement accounts to pay down unsecured debt, only to wind up a year later still in debt and now with no retirement savings. Oh, and then they have added a small fortune in tax debt, because the withdrawal is almost always taxed at a higher rate than is withheld at the time.
Nobody wants to make a bad situation worse, but if you are going to pay debt with a retirement account withdrawal — at least pay all of it. If you can’t, then talk to a bankruptcy attorney first. After that discussion you may still decide to take the retirement withdrawal, but at least you will know the alternatives. You may have a misunderstanding of how a bankruptcy filing will effect you. You may not know that a Chapter 13 Bankruptcy filing can let you pay as much of your unsecured debt as you can afford to pay over a five year plan only with ZERO interest. You may not realize that your retirement accounts (assuming that they are tax qualified) will be exempt in a bankruptcy (at least in Oklahoma — always, always check the law in your jurisdiction), meaning you won’t lose those funds in a Bankruptcy. You may think you make too much money to file for bankruptcy (you probably don’t but you may not be eligible for a Chapter 7 Bankruptcy).
Everyone needs to make peace with themselves about their current situation and what they have or have not done to address it. Just make sure that you understand all of your options before you sabotage your future by raiding your retirement accounts and incurring tax debt to boot.