Retirement accounts (401k's, IRA's, Pensions) are great ways to grow your money while reducing your overall income tax burden. Depending on how much you have socked away, the amount that you have in these accounts could be substantial.
Let's say you've become unemployed or have fallen on hard times. Feeling a pinch to cover your expenses and make your regular credit card, car, or house payments, you instead start thinking about this potentially large amount of money that you have "sitting" around as a way to preserve your financial well being for a little while. It's your money, you can cash this account out. But should you?
While it is commendable that you wish to meet your responsibilities and continue to make your monthly payments, you should really think about what it is your are giving up. Chances are once you cash out the account, you'll face significant tax penalties and you have made what is generally untouchable in a Bankruptcy fair game for your creditors because the money is no longer in a retirement account.
Before we even consider how Bankruptcy protects these assets, let's think about how withdrawing from your retirement account will usually only delay the underlying problems. Let's say you have $50,000 in a retirement account and you decide to withdraw that amount. Well, now it is no longer $50,000 because you will have to pay taxes and penalties because of the early withdrawal. So, now you have less money, and depending on your debt, you may catch a few things up, but you are probably only going to find that you are treading water for a little while.
What happens if you decide to go the Bankruptcy route instead of cashing in a retirement account? Usually, the amounts that you have in retirement accounts are exempt under a Bankruptcy and therefore protected by creditors. For instance if you have an IRA and you declare Bankruptcy, you can generally exempt up to $1,000,000 (thanks to the 2005 Bankruptcy law, which specifically included IRAs) worth of assets in the IRA. This means that you get to keep your IRA.
401(k) and Pensions will result in similar exemptions. The benefit is that you get to keep your retirement money for retirement, while avoiding tax penalties and still getting the fresh start that Bankruptcy provides.
So before you cash out a retirement account to attempt to get caught up on a situation that is probably out of control, you should consult with a Bankruptcy Lawyer to see all of your options.
The Law Office of Jeffery M. Haupt is located in South Bend, Indiana and helps people handle family law issues such as divorce, parenting time, child support, paternity, and child custody. The information in this blog should only be used for educational purposes and not be construed as legal advice. Nothing in this blog creates an attorney-client relationship between me and any readers of this blog. No attorney-client relationship is created until you have a document from me saying so. We are a debt relief agency, we help people seek relief using the Bankruptcy Laws.
