Why retirees shouldn't use their 401(k)s to pay off debt

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Our daily roundup of retirement news your clients may be thinking about.

Why clients should never use a 401(k) to pay off debt
Clients may want to avoid tapping 401(k) savings to pay off debt and stave off bankruptcy, according to this article on Money. The law prohibits creditors from seizing debtors' 401(k) assets to repay debt. “Most folks do not want to file for bankruptcy and they try everything they can to avoid it. They pay down the debt in this way [using their 401(k)], and then the debt mounts again, and filing for bankruptcy becomes the inevitable option,” says an attorney.


How clients could forfeit Social Security benefits
Older clients who intend to file for Social Security before reaching the full retirement age can expect the program to withhold a portion of their retirement benefits based on the earnings test, according to this article on Motley Fool. Social Security will withhold $1 in retirement benefits for every $2 of income exceeding $17,640. These benefits will be recalculated once they reach their FRA, although the increase will not commensurate what they lost.

Clients aren’t using catch-up contributions in 401(k)s
Only 30% of workers in their 50s are taking advantage of catch-up contributions in their 401(k) plans, according to this article on Yahoo Finance. Not making these contributions, especially for those who are behind their retirement savings goals, can be a big mistake. Socking away additional $6,000 in a 401(k) plan could mean $250,000 more in savings and a reduced tax bill, assuming a 7% annual return, according to industry data.

Exempting your client’s retirement account from taxes
Saving in a Roth IRA could be a better option than funding a traditional IRA, especially for clients who are likely to move to a higher tax bracket in retirement, according to this article in Forbes. Clients will pay taxes on contributions plus earnings at a much higher rate. “In most scenarios, the Roth will work out to be better for your retirement even if tax rates don't change. However, the more tax rates rise, the better the Roth looks,” the article says.

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Social Security Retirement planning Retirement readiness 401(k) Bankruptcy
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