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Medical Debt Tip 6. Keep your retirement money

Using your retirement savings now can leave you unprepared for your future

One of the Internal Revenue Service’s acceptable reasons for dipping into your 401k, 403b, IRA or Roth IRA is to pay medical bills. This is usually called a hardship withdrawal and, depending on your employer’s retirement plan, you can simply withdraw the money (and pay a tax penalty), or you can take a loan against your retirement funds. While paying off the debt with your retirement money can feel good, it comes at a high price. The money you place in your retirement account is for your future. In addition, that money typically increases in value as long as you have it in your retirement accounts. The interest you earn on investments and the match you receive from your employer (if applicable) make that money worth much more than it is if you take it out to pay bills. You are literally short-changing your financial future.

Take the time to discuss all of your options with a certified credit counselor. There may be repayment plans available that will make your payments to your medical provider affordable or you may have other options that will reduce the overall cost of the bill. It is important to exhaust all of your choices for paying down the debt, before deciding to use your retirement account.

Published Oct 24, 2011.