Bankruptcy and Your 401(k) Retirement Funds

Here is yet another financial tactic that's very damaging to your long term interests. When you're sinking in debt you will grab at any cash you can get your hands on. But tapping into your personal 401(k) retirement funds is a VERY bad idea.

First you'll have to pay those penalties. Between the penalties and the taxes anywhere from 35-40% of your money will vanish the moment you withdraw it. Next you lose the much larger sum you'll need when you retire years from now. If you withdraw 10 thousand, that money would have grown to 15,000 or more in the years ahead. In reality you're losing much more money down the road.

And if you're using your 401(k) funds to pay off an unsecured debt like a credit card balance, you're sacrificing your financial future when you might have been able to wipe away your unsecured debts through a chapter 7 bankruptcy.

Unless you're highly motivated to protecting an asset such as your home, leave your 401(k) retirement funds alone.

401K and IRA Bankruptcy Exemptions

The new bankruptcy law introduces so many new restrictions, but the new law does include a few breaks for working Americans. One such break has to do with IRA and 401k retirement plans.

Though the rules are rather complicated, generally speaking your retirement programs are exempted from liquidation up to one million dollars. Ask your bankruptcy lawyer for more detailed information.

Discuss placing funds into your IRA or 401k with your lawyer. You may be able to shield some money in this way though there may be time limits so place the funds into the IRA 1 year before filing for bankruptcy.
 

Personal Bankruptcy and Retirement Plans

Your retirement/pension may or may not be exempted. It all depends on how it’s set up. It may be protected if it’s covered by the federal ERISA act (Employee Retirement Income Security Act).

Under federal rules, if you have limited access to your money, the bankruptcy court can’t get at it.

Call your benefits coordinator to see if your plan is so covered. A non-Erisa plan may also be safe but you’ll have to check with an attorney familiar with the latest retirement law changes. You’ll also have to check with your attorney concerning your IRA plan. Your funds may or may not be sheltered.