When you file for bankruptcy, you will most likely get to keep your 401(k), pension, IRA or any other ERISA qualified retirement account. This is critical to understand. Too many of my clients have maxed out their 401(k) loans to pay back creditors only then to find out they are still in debt. Meanwhile, the repayment plan on the loan is taking money needed to pay for necessities.
Retirement accounts are not property of the bankruptcy estate.
When you file for bankruptcy, your property becomes property of the bankruptcy estate. Retirement accounts, however, are not considered part of the bankruptcy estate. You still have to disclose the accounts and exempt them but under the bankruptcy code changes in 2005, you will get to keep them with some exceptions. The retirement plans you can keep are:
- Any plan under sections 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code (“IRC”),
- Any Roth, SEP, or simple IRA,
- A self-employed person’s Keogh,
- Profit sharing plans,
- Defined benefit plans and pensions.
Retirement account exceptions in bankruptcy.
While a vast majority of retirement plans are yours to keep there are some exceptions. You cannot have a total of more than $1,171650 per person. That’s over 2 million dollars for a couple. That amount is so huge that for most people that it is not a realistic problem. Also, the retirement account must be a qualified plan by the IRS. You may need to contact the plan administrator for a copy of the qualifying letter. Some bankruptcy trustees will require a copy of the verification so be prepared to get one. Another exception is any contributions made to a retirement account while you were insolvent may be recovered by the trustee. If you are about to file for bankruptcy and transfer money into your Roth IRA, that transfer may be set aside.
Another big exception isn’t really an exception but it can be a problem. Cash from a 401(k) is not exempt once you pull it out. If you pull out a loan or are receiving monthly payments from your retirement plan, that money loses it’s protection and must be exempted like any other asset. If you are going to take money out of a retirement plan, it needs to be an absolute necessity and it should be done after your bankruptcy is completed. If I could give you any advice about your retirement accounts, it is this: Do not touch them until retirement age. Just don’t do it.
If you have a lot of debt, consider filing for bankruptcy, discharging your debt, and keep your retirement accounts. I know you want to avoid filing for bankruptcy but invading your 401(k) is not the solution.
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Christopher McAvoy is a Taylor, Michigan attorney and consumer bankruptcy lawyer who helps people in the Downriver area file Chapter 7 and Chapter 13 Bankruptcy. To find out more about bankruptcy, click here for contact info.