I know it’s hard. I know you’re desperate. You’re stressed and losing sleep. Things are tough. You have to do something, and soon.

But whatever you do, don’t touch your retirement account. Don’t borrow against it. Don’t withdraw from it. Leave it alone.

What’s so bad about liquidating a retirement account?

Momentum. Your retirement account, even if it’s currently losing value, is money you are going to need after you reach retirement age. And I can guarantee you are going to need it much worse then than you do now. If you bleed it dry now, you stop the momentum—the pace at which it is growing. Think of your retirement account as completely out of your reach for now.

Penalties. This is huge. The penalty for early withdrawal (before you are 59 1/2) is severe. You will lose 10 percent right off the top. If you don’t think that is significant you are not thinking straight. Calculate how long you will have to work and contribute in the future to make up for this loss.

Taxes. If you think you’re losing sleep now, just wait until you owe back taxes on retirement withdrawal. You have to pay income tax (federal and state if you live in a state that taxes income) on the entire amount all at once. Let’s say you cash in a $50,000 retirement account. You will get a check for $45,000 (the penalty is collected before distribution). Then you should expect to pay about $16,000 in taxes, leaving you $29,000 of the original $50,000 and nothing left for retirement.

Loss of exemption. A unanimous Supreme Court ruled in 2005 that Individual Retirement Accounts are shielded from the reach of creditors in bankruptcy proceedings, a decision that boosts protections for the nest eggs of millions of people.

That means no matter what happens or how bad things get before you turn the corner and get back to work, creditors can’t touch it. And more importantly, if, God forbid, you have to file a bankruptcy case, it means that no matter what, the trustee can’t touch your retirement account, either.

Generally, whether a debtor in a chapter 7 bankruptcy case is able to keep an asset like a home or vehicle depends upon whether the asset is “exempt.” Most states provide for specific categories of assets to be exempt. If your state doesn’t have its own exemption scheme, debtors there will use the federal exemptions. For example, New Jersey does not have state exemptions so residents there use the federal exemptions, which do not provide a lot of protection.

Again, using New Jersey as an example, the federal homestead exemption is only about $20,000. So if a New Jersey debtor has equity in his or her home, he or she can protect only about $20,000 of that equity in a chapter 7 bankruptcy case.

In almost all cases, when facing the prospect of bankruptcy, it is better to have exempt assets than non-exempt assets. If you find yourself in the unfortunate position of needing to restructure your debts and perhaps file a bankruptcy case, your restructuring professional will attempt to keep exempt assets “off the table” since they generally are unavailable to creditors and the trustee in bankruptcy. That means you almost always get to keep these assets.

One category of exempt assets is retirement accounts. Your 401(k) account and/or IRA are exempt. That value might be substantially greater than any other asset because there is no hard limit on the amount that can be preserved in a retirement account.

No matter how difficult things are right now, cross your retirement account off your list of options. It is out of your reach for now. Then, get busy pursuing every other option that you have.

As difficult as things may be right now or may become in the future, I promise that in 10 years you’ll thank me.

As always, you should seek counsel from an attorney, tax or other qualified professional for specific details relevant to your situation and before taking this advice or making any financial decision with regard to retirement accounts.
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