Before you dip into your retirement savings...read this

While many people consider it common knowledge, the last-minute fear before deciding to file bankruptcy could end up costing you even more come retirement. Turns out, that as the recession deepens, more people are looking toward their long-term savings for an influx of cash to help stay afloat.

Well, don’t ever be one of those people. Typically, what ends up happening is that you wind up without retirement money and still filing bankruptcy. We’ve seen it happen. And it’s hard to watch.

An article on USAToday.com pointed to figures that show a record number of people in the second quarter of this year used their retirement accounts to help stave off a financial problem. Specifically, the article cited Fidelity Investments’ report that 2.2 percent of their 401(k) customers accessed their accounts for “hardship withdrawals.” That rate demonstrates a two percent increase from last year. And, almost half of those that accessed funds last year did it again this year.

So what does that tell you? It says to us that accessing your retirement savings doesn’t help you.

Look, we’re all for doing everything you can to prevent and treat an economic illness. But typically, we recommend a second job, selling an extra car and drastically cutting expenses. If bankruptcy enters the picture, please add to its benefits the preservation of your retirement savings. What many people don’t understand about bankruptcy is that once you open the 401(k) coffers, many creditors are automatically invited in should you have to file. If the chest remains locked, they hardly ever see the key.

Additionally, most of the bills that are bogging you down can be discharged in a bankruptcy.

Federal guidelines prevent you from contributing to your 401(k) for six months after you withdraw funds early, meaning you are also losing those gains, furthering your losses and reducing the value of the withdrawal itself.

And probably the most important reason to not prematurely access your retirement accounts is that you have to pay for doing it. The money you withdraw is considered taxable income by the good ‘ole IRS. So come April, guess what? That’s right: more out of pocket expenses.

A scarier fact than the mere increase in retirement savings access is the primary reason why people are doing it: to avoid foreclosure. Wow. Now there’s a sign about the state of our economy.

Financial companies that manage 401(k) plans allow hardship withdrawals for things like buying a home or paying for college without a penalty directly to the company. But you still have to pay the taxes. And given the behavior of much of the financial industry today, namely banks and credit card companies, don’t expect the penalty-free trend to last much longer.

The USA Today article goes on to mention to that college tuition is the second most popular reason people want early access to retirement savings. Our first reaction is that if paying for college requires any form of money granted under the title of “hardship,” you should find another way to take care of it. Sure, we have not been overly positive about the state of the student loan undustry here on this blog but provided your child never ends up having to file bankruptcy, they are a proven way to help people get a college diploma.

Instead of using your retirement savings like an ATM machine, use it as a benchmark to signify that it’s time consider bankruptcy. If that is all you have left to access, then you have nothing left to access.