How are IRA and 401k accounts affected by bankruptcy?

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401k bankruptcy nest egg

Any money held in a 401k or IRA account is an exempt protected asset.  This means that it will be not be affected by a bankruptcy filing and none of the money in an IRA type account can be reached by creditors or the bankruptcy court.  A debtor could have a million dollars in an IRA account, and it would all be protected from his creditors.

A person thinking of filing bankruptcy should seek the advice of a bankruptcy attorney before withdrawing any portion of money from any retirement account. Once money has been withdrawn from the protection of an IRA, that money may be subject to being taken by creditors.

Additionally, there are often taxes and penalties owed on money withdrawn from a retirement account.  A bankruptcy lawyer can inform a debtor of these potential consequences as well.

A debtor should NEVER withdraw money from a retirement account to pay credit cards or other unsecured debt without first consulting a bankruptcy attorney.  I have often had clients come talk to me after they have exhausted all their options to pay their debts, including cashing out a 401(k) and using the money to try to get out of debt.  Unfortunately, that decision often results in the debtor still needing to file bankruptcy AND now owing the IRS or NDCOR taxes  and penalties which could have been completely avoided if the debtor had filed bankruptcy before withdrawing the money from her retirement account.

Save your retirement accounts for retirement and wipe out unsecured debts through bankruptcy.