If it feels like the days till payday just keep multiplying or if you are struggling to pay your monthly obligations, you may be tempted to tap your retirement savings to alleviate your financial hardship. Before making that withdrawal, take a few moments to evaluate whether this is the right move for you. 

1. Consider the Penalties

Unfortunately, if you cash in your retirement account before you are 59.5, the amount you actually get is significantly less than the balance that you have right now.

Withdrawals before the acceptable age are subject to income tax, state and local taxes, and an additional 10 percent penalty. This applies to traditional IRA accounts and 401k accounts. 

The exception is if you have a Roth IRA. With a Roth IRA, you can withdraw your contributions at any time without penalty. Since Roth IRA contributions are not tax advantaged (meaning that you have already paid income tax on the contributions and they are not tax deductible), you do not have to pay taxes again when you take the money out. However, if you withdraw the earnings before you are 59.5, you usually have to pay taxes and penalties.

You may be enticed to take a loan, rather than a withdrawal, from your 401k. As long as you repay the loan, it can be a smart option to help your monthly budget. However, if you default on the loan, know that you will owe taxes and penalties on the amount that you have not repaid. If you leave your employer, the entire amount of the loan may be due. Check the terms of your specific plan.

2. Calculate Your Lost Interest

If you make a contribution of $10,000 and let it grow for 30 years at 5 percent interest, you will have $43,219 after 30 years, even with no additional contributions. This is the power of compounding interest. When you take money from your retirement account, you are eliminating the money's ability to compound and grow over the years.

3. Ponder Your Financial Future

For some individuals with a high amount of credit debt or personal loans, bankruptcy may be in their financial future. If you think you may file for bankruptcy, think twice about taking money from your retirement accounts to make ends meet. Most retirement assets are exempt from creditors during bankruptcy. 

If you file bankruptcy, creditors are not able to access your 401k and pension plans to repay your debts. This applies to both chapter 7 and chapter 13 bankruptcies. Roth IRAs and traditional IRAs have a limit that is safe from creditors; up to $1,283,025.00 is excluded from being considered for debt repayment. Amounts over this figure may be seized or taken into account during bankruptcy proceedings.

Money problems are a significant source of stress for many individuals. Before you use retirement accounts to pay your obligations, make sure to evaluate all of the possible ramifications of your decision.

Contact a local bankruptcy law professional, such as Arthur M Richard, for further assistance.