If you've ever followed finance guru Suze Orman, you know that she always steers people away from taking out loans against their retirement accounts. Well, hold on to your hat, because Orman is advocating just that for desperate furloughed workers who are running out of fiscal options.
With the government shutdown edging into a month, Orman stated on a recent episode of the Women and Money podcast that for "the first time in the history of [her] . . . career" she is suggesting doing just that. She added that those without "money to pay . . . bills . . . or feed [their] children, [they] might want to consider taking a loan from [their] retirement account."
Financial experts generally discourage clients from doing this because of penalties and taxes they wind up paying. Also, they stand to lose market gains from the IRA or 401(k). Then, too, the loan must be repaid within five years — plus interest.
But in emergencies like the government shutdown, people have to think outside of the box. Orman said, "When you're being held hostage by the U.S. government, you need to know your options."
Of course, you don't have to be a furloughed worker to be feeling the squeeze financially. It's possible that you could give yourself a short-term loan and catch up.
Generally speaking, if you have multiple options, tap your Roth IRA first. Because you pay taxes when you pay into the account, you won't owe anything to witdraw funds.
Those without an IRA should think long and hard about tapping their 401(k). A better option might be to run up credit card debt. That way, if the bottom still falls out, your debt can be discharged in a Chapter 7 bankruptcy, leaving your 401(k) intact.
The key element here is to repay the loan. Once your financial situation stabilizes, begin making payments until you are caught up.
Still unsure where to turn for debt relief? Speak to a Medina bankruptcy and debt relief attorney for advice.