Retirement Accounts and Bankruptcy
A person in financial hardship should never withdraw funds from a retirement account early. Retirement accounts are generally protected in bankruptcy and the withdraw will remove the protections. The early withdraw may also result in tax consequences and additional penalties.
Early Withdraws May Result in Tax Consequences and Penalties
Early withdraws from qualifying retirement accounts can result in additional taxes and penalties. A withdraw is considered early if it is taken out of a retirement plan before the taxpayer is 59½ years old. The person making the early withdraw must then pay income tax on the amount taken out. The person may also be subject to an additional 10 percent tax! There may be exceptions to the additional tax depending on the circumstances.
Early Withdraws Don’t Fix the Finances
Beyond the taxes and penalties, early withdraws from retirement accounts for the purpose of catching up on bills generally does not fix the negative financial situation. The amount withdrawn typically doesn’t cover the entire amount owed and the person continues life with a big chunk of debt. The result is a significantly reduced retirement account and financial trouble down the road as the person approaches retirement.
Most Retirement Accounts Protected in Bankruptcy
Retirement accounts qualified under the Employee Retirement Income Security Act (ERISA) are excluded from bankruptcy. Most employment based retirement plans such as 401(k)s, 403(b)s, defined-benefit, and profit-sharing plans are typically ERISA-qualified. Other non-ERISA accounts may qualify for an exemption. An exemption means the retirement account would be protected from the bankruptcy.
Retirement accounts that are not protected in bankruptcy typically arise from privately funded accounts. For example, transferring $50,000 from a bank savings account to an IRA shortly before filing bankruptcy will likely result in questions by the trustee. The question is whether it was a fraudulent conversion from a non-exempt asset to an exempt asset with the intent to commit fraud.
Sacramento Bankruptcy Attorney
Whether you’re considering bankruptcy or simply trying to find a way to fix the debt problem, it is highly recommended that you speak with a bankruptcy attorney. Most attorneys will provide a free initial consultation and its an opportunity to learn the options. Feel free to contact Sacramento bankruptcy attorneys to set up a free initial meeting. Retirement accounts and bankruptcy mix very well together if handled correctly.
By: Trevor Carson Google+
*The information provided in this post does not constitute legal advice or opinion. The information is for guidance purposes only. Individual situations vary and you should contact an attorney for a consultation. This post is considered a solicitation and advertisement. The post does not warrant the outcome of any matter. Sacramento Bankruptcy Attorney on retirement accounts and bankruptcy.
Sacramento Bankruptcy Resources
United States Bankruptcy Courts – Bankruptcies are filed in federal courts. Here is a link to the federal courts website for bankruptcies.
United States Bankruptcy Court, Eastern District – A link to the bankruptcy court in Sacramento.