Are your retirement funds in danger if you file bankruptcy?
Generally, no. Most retirement accounts are not considered to be part of the bankruptcy estate, and are out of the creditors’ reach. This includes traditional 401(ks), IRAs, government retirement accounts such as CalSTRS and more.
If you are expecting a pension or are receiving a pension, creditors also usually don’t have a right to go after it, especially if you are receiving a defined amount each month and don’t have a right to cash out the pension or to ask for higher payments.
Also, the creditors do not have a right to go after Social Security benefits.
A quick way to gauge whether the retirement funds are risk, is to ask a question: can you withdraw all these funds today without a tax penalty? If no, then you likely have a traditional retirement account which will not be affected by bankruptcy. But, if the funds are freely available to you without a penalty – for example, if you opened a regular savings account and earmarked it for “retirement” savings – then the funds will be counted among your regular assets when you file bankruptcy.
This sometimes comes up as an issue with the self-employed – they may believe the account they opened has been properly set up as a retirement account, and later find out that the proper formalities have not been followed. If you are not sure that the retirement account has been properly set up, double check with your bank or accountant.
Another rare issue involving retirement accounts sometimes comes up with tax liens. It is unusual for the IRS to go after retirement accounts, and usually they would only do it in the most egregious situations when the tax debt is really large, and they are not able to collect any other way. If you find yourself in this situation, the bankruptcy case can help you to repay or defer the tax debt.
You can normally continue making retirement contributions even while you are in the bankruptcy case, and sometimes you may even have to pay less to creditors because you are making retirement contributions.
Don’t make any rushed decisions with regard to retirement funds and contributions if you are thinking about bankruptcy. If you are making retirement contributions, don’t stop. Don’t close or cash out your retirement accounts, and don’t transfer your retirement funds to anybody else – if you do, it will likely only hurt your case and you will have to pay a tax penalty.
Consult a bankruptcy attorney in your area to find out how your retirement funds and contributions would be treated by the court in your particular situation.