Many times I talk with people who are filing bankruptcy and they tell me that they have no retirement accounts, that they withdrew virtually everything in their 401(k) or other retirement account to pay creditors. Despite that they are still underwater and in need of bankruptcy. It always makes me sad to hear that. There are two really good reasons not to raid your retirement account to try to stay afloat.
It’s Your Future. A retirement account is more than a savings account. It’s your future after your career is over. Don’t jeopardize your ability to retire some day by trying to cover expenses now. You might be thinking, “well the creditors will sue me and they will get my retirement at that point.” No, they won’t. That’s my second really good reason not to tap into retirement to pay bills.
Retirement Accounts Are Exempt. Under federal and most state laws, retirement accounts are exempt from creditors’ claims. This means a creditor holding a judgment against you cannot garnish your retirement account the way he can your wages or a regular checking account. Utah limits the exemption to amounts contributed a year or more prior to when the creditor attempts to collect, so your prior 12 months of contributions are at risk, but anything contributed before that is protected. Under federal law, applicable in bankruptcy, your retirement account is fully protected regardless of when you made the contributions.
The one key is that your retirement account has to be a “qualified” retirement account, meaning one that meets the requirements of the Internal Revenue Code for tax exempt status. IRAs (regular and Roth), 401(k)s, state and local government retirement accounts, SEPs, Keogh plans and other forms of retirement accounts meet this criterion. What doesn’t qualify is a savings account, stock or bond fund or other investment account even if you consider it your “retirement fund.”
If you need help determining whether your assets are exempt or whether you should use some to pay bills, contact us.