It has never been easy to save for retirement with so many demands on our paychecks throughout the years. Getting married, buying a home, raising children, and sending those children to college are just a few of the things that have a major impact on the money we have available to save for our golden years. As Americans, we’re not terrific at saving for retirement, with a reported $65,000 average retirement account savings per household in 2019.1 But while that number may not be what we ideally need to retire, it is hard-earned money that we sacrificed to save.
When a person files for bankruptcy there are a lot of questions surrounding whether they will be able to keep their retirement savings.
It’s important to understand that it is a mistake to try to pay off significant debts with your retirement savings. This is due to the fact that most retirement savings can be protected when you declare bankruptcy. Many people owing debts don’t realize that most retirement fund withdrawals are taxed at the time of withdrawal, providing them with significantly less money than the amount withdrawn, and if they are under 59-1/2 years of age they will also pay a 10 percent early withdrawal penalty.2
If they can’t pay off their debts after a retirement fund withdrawal and do have to declare bankruptcy, the retirement money they used to try to pay off their debts is gone. It could have been secured and protected by declaring bankruptcy. This is one example of why it is important to hire a bankruptcy attorney to provide expert advice as soon as you feel you are getting into financial trouble.
With the bankruptcy law changes made by Congress in 2005, with a few exceptions your creditors are generally not entitled to Employee Retirement Income Security Act (ERISA) qualified retirement accounts and pension plan funds.3
ERISA-qualified pension plans include not only 401(k) but also 403(b), Keoghs, profit-sharing plans, money purchase plans and defined benefit plans.4 You will not have to liquidate your assets in these plans under Chapter 7 bankruptcy protection and the funds in these ERISA-qualified pension plans will not be taken into account when a Chapter 13 repayment plan is developed.
Individual retirement accounts (IRAs) are handled differently as they are not ERISA-qualified pension plans. In bankruptcy, your creditors can be paid back with the excess over $1,512,350 per person that you have in your traditional IRA or Roth IRA account(s). SEP and SIMPLE IRAs are fully protected under bankruptcy.5 The traditional IRA or Roth IRA amount that is protected in bankruptcy increases with cost of living increases every three years and was just adjusted on April 1, 2022.
If you have money saved for retirement in a bank or credit union or in an investment account, that money is not protected when you declare bankruptcy, although state bankruptcy laws may allow you to keep several hundred dollars. Your retirement accounts may also be seized by the U.S. Internal Revenue Service with a valid tax lien.6 Bankruptcy can be complicated and mistakes can be costly so it is best to hire a qualified bankruptcy lawyer to provide expert advice on your particular situation.
Is Bankruptcy for You?
As more and more people are struggling to make ends meet with rising inflation, filing for bankruptcy may help provide some security down the road. The bankruptcy attorneys at Hines Law in Massachusetts can help you decide the best solution to your financial struggles.
We specialize in Chapter 7 and Chapter 13 filings with 20+ years of experience ensuring sound advice and compassion. Personal bankruptcy can be a chance to take control of your finances and rebuild a financial future while protecting your eligible assets. Call and schedule a Free Consultation today, Free.
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1 Average Retirement Savings in the U.S.: $65,000 by Jack Caporal, 7/20/2021
Link: https://www.fool.com/research/average-retirement-savings/
2 How to Withdraw Money from Your 401(k) Early by Troy Segal, 3/5/2022
Link: https://www.investopedia.com/ask/answers/101314/how-do-you-withdraw-money-your-401k.asp
5 Is My IRA Protected from Bankruptcy?
Link: https://www.themoneyfarm.org/personal-finance/retirement/ira/is-my-ira-protected-from-bankruptcy/