If you’re considering bankruptcy, one of the major concerns is likely what will happen to your retirement accounts, such as 401(k) or IRA. While it’s understandable to be worried, it’s important to understand how bankruptcy laws treat retirement accounts.
First, it’s essential to know that retirement accounts are typically protected in bankruptcy. The Bankruptcy Code exempts certain retirement accounts from the bankruptcy estate, meaning they cannot be seized to pay off debts. This exemption applies to both Chapter 7 and Chapter 13 bankruptcies.
The exemption covers most types of retirement accounts, including 401(k)s, IRAs, Roth IRAs, SEP IRAs, and SIMPLE IRAs. The exemption amount is unlimited for traditional and Roth IRAs, while the limit for 401(k)s and other types of plans is currently over $1 million.
However, it’s important to note that the exemption only applies to funds that are genuinely retirement savings, not to regular checking or savings accounts that a person designates as being for retirement. It’s also essential to keep in mind that bankruptcy laws and exemptions vary by state. While the federal exemptions apply in most cases, some states have their own exemptions that could impact the protection of retirement accounts.
Moreover, while retirement accounts are usually protected in bankruptcy, taking money out of retirement accounts to pay off debts before filing for bankruptcy may not be the best solution. Doing so could result in penalties and taxes that may have been avoidable if the funds were left in the retirement account and protected through bankruptcy.
In conclusion, retirement accounts are usually protected in bankruptcy, meaning they cannot be seized to pay off debts. However, it’s crucial to ensure that contributions made within a year before filing are not included, and state laws may impact the level of protection. It’s always best to work with an experienced bankruptcy attorney to understand how bankruptcy laws and exemptions apply to your specific situation and how to protect your retirement accounts during bankruptcy.
Schedule a free telephone appointment to discuss your unique debt situation with attorney Jennifer Weil at my Setmore page.
