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Can You Keep Your 401(k) or IRA If You File for Bankruptcy?

One of the misconceptions about filing bankruptcy is that you “lose everything.” While it’s certainly true that you’ll have to adjust and sell some assets, bankruptcy law contains several exemptions that allow you to protect certain assets from creditors.

Retirement accounts are one of those exemptions — retirement savings and income are generally untouchable during bankruptcy. Under current law, virtually all types of ERISA-protected pensions and retirement accounts are shielded from creditors.

Types of plans your creditors can’t touch include:

  • 401(k)
  • 403(b)
  • Individual retirement accounts (IRAs), including traditional, Roth, SEP and Simple (although there are caps on IRA protections)
  • Profit-sharing plans
  • Defined benefit plans
  • Keogh plans

Assets that are not protected include regular savings accounts, investment accounts, stock option plans, and other types of investments that aren’t part of an ERISA-qualified plan.

It is important to note that the exemption for IRAs is limited. If you have more than $1,362,800 in your IRA (or in multiple IRAs combined), the bankruptcy court can require you to use the excess to repay your creditors. This exemption limit applies until 2022, when the limit is scheduled to be adjusted. There are no limits on the exemption for the other types of retirement accounts.

Crucially, the money in your retirement accounts loses its protection if you withdraw it or take a distribution. Bankruptcy courts can reach any portion that you remove from the account. You should speak with your New Jersey bankruptcy lawyer before taking any withdrawals or distributions from a retirement account prior to or during your bankruptcy case.

It is not a good idea to transfer large amounts of money into a retirement account prior to filing bankruptcy, particularly if you obtain the cash by selling assets. When you liquidate (sell) assets right before bankruptcy and deposit them in a retirement account, it raises alarms for the bankruptcy court. The court has the power to force you to withdraw the funds and turn them over to creditors, meaning not only do you have to pay those creditors, but you may incur early retirement withdrawal penalties and taxes, too.

The Law Offices of James C. Zimmermann helps clients achieve much-needed debt relief and get a fresh start. We’ll talk through how to handle your retirement accounts and all other property if you file for bankruptcy. Get started by scheduling a free consultation by calling us at 973-764-1633 or contacting us online. Our offices are conveniently located in Hackensack, Vernon, Wayne, Pompton Lakes and Nutley, New Jersey.

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