No, You Won’t Lose Your Retirement Money In Bankruptcy
If you are filing for bankruptcy, the one thing you really can’t stand to lose, is your retirement account. Luckily, bankruptcy will usually not do anything to your retirement, and most retirement accounts are completely bankruptcy exempt.
ERISA and Non-ERISA All Get Protections
Because of a 2005 law change, almost every kind of ERISA retirement plan is completely safe from being taken from the bankruptcy trustee. This includes protection for both bank accounts and pension plans, so long as they are ERISA qualified. ERISA plans are those that are established by your employer.
Even non-ERISA accounts that are still considered retirement accounts get protection, but there, the protection may be limited to a certain dollar figure.
Additionally, because the accounts are exempt, they also won’t increase the amount of your payments, the way non-exempt property does when you file for Chapter 13 bankruptcy.
Accounts that are considered 403(k) and 403(b), IRAs, and profit plans are all safe from being taken in bankruptcy.
Some kinds of accounts, such as IRAs and Roth IRAs (which are usually non-ERISA plans) have limits on the amounts exempted. For example Roth IRAs have a limit of about $1.3 million. This is a total amount—it is not on a “per account” basis. This amount does adjust every three years, with the next adjustment set for 2022.
Designated and Non-Designated Retirement Accounts
Remember that these are all ERISA or otherwise, designated accounts. Simply taking money and putting it into an account on your own doesn’t qualify as an actual retirement account.
Additionally, only qualifying accounts are exempt. Once the money is paid out to you, the money loses its exempt status.
There are restrictions on how much a bankruptcy court can take from you, when you receive payouts from an exempt retirement account, but those restrictions aren’t as protective as what the money gets when it is simply sitting in a retirement account.
Additionally, the money that you get from your retirement account even if it cannot be taken, can be counted as income for the purpose of the means test, and thus can force you into having to file a Chapter 13 instead of a Chapter 7 bankruptcy.
Don’t Withdraw Retirement Early to Pay Off Debt
All this is why it is usually a bad idea to use retirement money to pay off debts. Bankruptcy may be a much better idea, especially if you have sufficient retirement funds.
Withdrawing your retirement funds will result in a serious tax penalty to you, and you’ll be doing it to pay off debts that you could get rid of in bankruptcy, while still keeping all of your retirement accounts.