On behalf of Law Offices of Mark M. Kratter, LLC on May 02, 2012
Due to the ebbs and flows of the economy, which still appears to be struggling, many Connecticut residents continue to have trouble paying their mortgage, credit card bills and other financial obligations. As we have discussed before on this blog, filing for bankruptcy can help a person who is deep in debt with managing that debt and ultimately gaining a solid financial footing. In that vein, readers may be interested to learn how retirement accounts are treated in bankruptcy.
Although it varies from state to state, a retirement plan such as a 401(k) or company pension is typically fully protected in bankruptcy. This means that no matter how much money is in the plan, no creditor can touch it. Additionally, a 2005 federal law extends those protections to an IRA or Roth account. The protection is limited, though, to $1.17 million.
The protection afforded to retirement plans is meant to ensure that even if one enters bankruptcy, he or she is not left struggling when it comes time to retire. However, the protection only extends so far. That is, while the funds are protected as long as they stay inside the account, they are not necessarily protected if withdrawn from the account. Many times, though, debtors think that the best thing to do when faced with unmanageable debt is to withdraw from their IRA, but that subjects those funds to a possible creditor action while putting their retirement funds in jeopardy.
In the end, if you find yourself at the point of deciding whether to withdraw funds for a retirement account, you may want to think twice and consider bankruptcy. By knowing your legal rights, you may be able to enter bankruptcy with minimal hassle and minimal stress.
Source: Seeking Alpha, "IRA Bankruptcy Protections," Ryan Glover, April 17, 2012
