Keeping Your Retirement Account Monies In Bankruptcy

Can I protect my retirement accounts in bankruptcy?   Yes.  Generally.

How?  Simply by the proper filing of a personal bankruptcy.

So long as you have your retirement monies in mainstream retirement accounts, an experienced bankruptcy attorney will help you “exempt” your retirement account so that the Bankruptcy Trustee will not be able to touch it.

What Types of Retirement Accounts are Exempt?

The following retirement accounts are exempt, which means that they are safe from your creditors:

  • 401k accounts.  These are one of the most popular retirement plans.  Many employers have them.  Many employers match their employee’s contributions, up to a certain amount.  The money in the account is exempt.  Just as a reminder, when you ultimately take the monies out of this account, they are taxable.  And, if you take the moneys out earlier than at “retirement age” there is a penalty from the IRS.
  • 403b and 401a accounts.  These are the “non profit” version of the 401k accounts.  They are set by non profits and educational institutions.  They have similar advantages to the 401k accounts.
  • IRA accounts.  Many folks have these.  Many folks have “rolled over” their 401k or 403b accounts into “Rollover IRA” accounts.  These are very similar to the 401k or 403b account, however they are “individual” and not associated with a company.
  • Roth IRA accounts.  Similar to all of the above with one huge difference:  these monies are taxed BEFORE they go into your retirement account…and…therefore, not taxed with you withdraw them.  Nor is there any minimum distribution when you take them out.  Thus, they are a wonderful retirement tool when in retirement.  They are exempt from most bankruptcies.
  • Keough, profit sharing and money purchase plans.  These retirement plans are often with small, closely held companies.  There are numerous administrative costs associated with such plans; however, they are invaluable as a retirement planning tool.  They are exempt from bankruptcy generally.
  • Defined benefit plans. These are a separate animal altogether, as the amount of the benefit, that is, the monthly payment during retirement, is “defined” by a formula.  This is the old school retirement.  Nevertheless, this type of retirement plan is exempt.  In a divorce, it may be complicated to quantify the “value” of this benefit.  However, in a bankruptcy, it is not necessary.

Exceptions to Exemption to Bankruptcy?

Are there any exceptions to exempting retirement accounts in bankruptcy?

It should be noted that once a retirement account, or the cumulative retirement accounts you wish to exempt, are over one million dollars, there is a formula.  It would be wise to work with an experienced bankruptcy attorney before trying to exempt any retirement account – you earned that money, the government says you can keep it for your retirement, so protect it carefully!

Why Should I Hire A Bankruptcy Lawyer?

An experienced bankruptcy lawyer will provide a carefully drafted and completely reviewed bankruptcy petition and schedules.  Poorly drafted bankruptcy petitions and schedules can result in a dismissal by the Bankruptcy Court.  It is critical to have an experienced bankruptcy lawyer review your income, assets, liabilities, and file a properly executed Bankruptcy Petition and Schedules.  Your retirement accounts may be one of the only things you can keep; protect them with a professionally drafted petition and schedules; protect them with an experienced lawyer at your side during this process.

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