What happens to my retirement accounts if I file bankruptcy?
If you are feeling the financial pinch, you may look to other assets that you have as a means of paying your debts. Although your retirement accounts may seem like a tempting and readily available source of funds, it is not a good idea to use them to get out of a tough financial situation. If you are experiencing the warning signs that indicate serious financial trouble, it is generally a better idea to file bankruptcy instead of breaking into your retirement accounts for a couple of reasons.
The first reason why you should leave your retirement assets alone is that accessing the funds will cost you money-both immediately and in the future. Once you withdraw money, you will likely be charged early withdrawal penalties and will owe taxes on your tax return for early access to the funds. Because of this fact, you will likely have to take out more than you planned to cover these liabilities. In addition to the immediate cost, you will also lose out on the compound growth of your money over the long term, which can come back to haunt you as you near retirement age.
The other reason why it is best to leave your retirement assets alone is that your retirement accounts are exempt in bankruptcy. This means that by law, your creditors cannot ask the court to apply the funds to satisfy your debts, if you file bankruptcy to relieve yourself of your debt load. Under federal and Texas bankruptcy laws, exempt retirement assets include:
• Traditional and Roth IRAs (up to $1,245,475)
• Keogh plans
• 401(k)s and 403(b)s
• Pension plans
• Most defined benefit plans
Since retirement accounts are exempt by law, they survive bankruptcy intact. Because of this, you can keep the benefit of your accumulated savings once the bankruptcy has been completed. However, you will also be free of most of your debts that you had before you filed bankruptcy.
Although retirement assets are generally exempt, it is important to note that they cannot be used as a way to defraud your creditors. After you file Chapter 7 or Chapter 13, the transactions you made before you filed bankruptcy will be scrutinized. If the court finds that you attempted to avoid paying your creditors by transferring assets into your retirement accounts before you filed bankruptcy, it can remove the exempt status from your accounts. At this point, the funds contained within can be used towards your debts.
Get help if in debt
Since retirement accounts are exempt in bankruptcy, it is foolish to steal from your future to take care of present debts. If you are suffering from overwhelming debts, bankruptcy may or may not be the best way back to solvency. The experienced attorneys at Pelley Law Office, L.L.P can listen to the situation in which you find yourself and recommend the best way of getting back on your feet.