Your 401(k) In Bankruptcy

Bankruptcy Attorney

Debt is a difficult situation, especially when you lack the means to fulfill your payment obligations. Financial hardship can strike anyone at anytime, and many people do not have an adequate savings or retirement plan to sustain them when money gets tight. If you are considering bankruptcy for debt relief, there are some things you should know about your funds in the process.

Protecting Your Money

According to a leading Cincinnati bankruptcy attorney, federal bankruptcy  laws protect your retirement funds in bankruptcy. Whether you file for Chapter 7 or Chapter 13, your retirement funds cannot be liquidated to satisfy debt payments. 401(k) and 4003(b) accounts are exempt from your bankruptcy estate.  Even Traditional and Roth IRAs are exempt up to a specified dollar amount. That is great news! However, there is one small catch. Taxes!

Some people cash out a portion of their retirement funds early to help make ends meet, pay off debt or take a vacation. Regardless of your rationale for withdrawing your funds, the  IRS can tax your early withdrawal amounts. Taxes and penalties on the early withdrawal of funds can range from 10 to 39.5 percent. Therefore, cashing out your retirement funds is not a solid financial strategy for the purposes of debt management or expendable income unless you are actually retired from your job.

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