If I file bankruptcy, will I lose my pension IRA or 401(k)?
Will I Lose my Pension, IRA, or 401(k) in Bankruptcy?
One of the most important messages that any bankruptcy attorney can convey to people in financial trouble is this, “We discourage any attempts to tap into your retirement funds in order to resolve your debt situation.”
Tapping into a retirement fund can be very dangerous because it affects a person’s future. It affects a future where they may not be able to work to bring in an income because of age or health status. That is why there are rules under the bankruptcy code that keep a person from being left without a sufficient retirement when the time comes.
Retirement Accounts Are Exempt In Bankruptcy
The answer to the question of, “Will I lose my pension, IRA or 401(k) in bankruptcy?” can vary based on the type of account. The good news is that most retirement accounts are exempt from being used to pay creditors during bankruptcy. Keeping those funds intact and healthy is one of the best ways to protect your assets and prepare for a much stronger financial future, regardless of bankruptcy.
As you live within your budget and reestablish credit after a bankruptcy, your retirement funds will continue to work for you, ready to provide for some of your financial needs later in life, undisturbed by taxation until they are withdrawn. Your retirement funds are protected from creditors and exempt in bankruptcy as long as you leave them undisturbed.
Individual Retirement Accounts and Bankruptcy
The Employee Retirement Income Security Act, or Erisa, protects most employer-sponsored retirement plans, including 401(k)s. The only time these accounts are not protected from creditors is when the creditor is the IRS or a former spouse. But it is individual retirement accounts (IRAs) that are not protected by Erisa. If you file for bankruptcy, federal law protects up to $1 million of an IRA that you directly contributed to.
If the money was rolled over into an IRA that’s part of a company plan, then the entire IRA balance is exempt from creditors being able to touch it. For this reason, it is very important for you to keep good records on where the funds came from. The reason is because an IRA and bankruptcy may not go over quite as well as a pension or 401(k). Still, the amount that is exempt is a rather high amount at $1 million and most people don’t have that much in their IRAs.
Cashing in or Borrowing from Retirement Accounts is not Effective Debt Relief
Countless clients of Debt Relief Legal Group who have tried to solve their debt problems by “borrowing” from their pension, IRA, 401(k), or life insurance policies have ended up filing bankruptcy anyway. Meanwhile, the money that they took out of these sheltered accounts, which was intended for use in old age, is gone.
Because you did not pay taxes on retirement funds when you earned the money, you will be required to consider whatever you take out as income for the year you cash it in. In addition, there will be extra taxes and penalties to pay when you cash in or borrow from retirement accounts and that may contribute to your debt situation.
Worst of all, the hole left in retirement savings that are tapped into prematurely is almost always never replaced. The missing funds are no longer there to continue earning compound interest. The result is a much larger gap in available retirement funds when the time comes to tap into these assets — with debt still unresolved in most cases.
If tapping into retirement accounts is even a consideration, that is an indication that there is a financial issue that needs a solution. Solutions should be sought as alternatives to taking money from retirement accounts or insurance policies. That way you preserve your retirement accounts and avoid the taxes and penalties that result from premature withdrawal.
Retirement Savings and Bankruptcy
For more information on the bankruptcy process or to speak with one of our bankruptcy attorneys in Tampa about your rights, contact the Debt Relief Legal Group to schedule a free initial consultation. Call us at 1-800-DEBT-RELIEF (332-8735) toll-free or contact us online to make an appointment with a bankruptcy lawyer at our Tampa office or any of our Florida office locations.