Is Your Retirement Fund Safe if Claiming Bankruptcy

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Many different retirement plans are available to individuals.

Most employers provide retirement benefits, such as 401k accounts, profit sharing plans, and/or pensions. There are also other tax-advantaged ways to invest for retirement outside the workplace, such as Individual Retirement Accounts (IRA).

When claiming bankruptcy, individuals who have invested their hard earned money in one or more of these plans need to know if their retirement fund is safe from bankruptcy proceedings.

To determine whether a particular retirement fund is safe, the individual must know if the fund is a qualified or a non-qualified plan. Qualified plans are the plans offered by an employer. A federal law known as the Employee Retirement Income Security Act, or ERISA, was passed in 1974.

This law protects an employee’s retirement fund from creditors as long as the money is still under the employer’s control. This does not include money that has been paid to the employee as a retirement benefit, only the amount that is in the employee’s retirement fund account.

Non-qualified plans, which include both traditional and Roth IRAs, are protected by the Bankruptcy Act of 2005. These types of retirement funds are protected from creditors up to a value of $1,000,000 under this law. Unfortunately, this protection may not be applicable in every bankruptcy proceeding, depending on the state of residence of the individual filing the bankruptcy claim and whether there have been any withdrawals from the IRA.

State laws can take precedence over the federal law protections in some limited circumstances, and can subject the retirement fund to claims from creditors. This is completely dependent on the law in the state where the bankruptcy claim is filed.

If an individual claiming bankruptcy has never withdrawn any money from his or her IRA, then the IRA is protected. However, if a withdrawal has been made from the IRA for any reason, the bankruptcy court may consider the withdrawal to be a prohibited transaction. If the court rules a prohibited transaction has taken place, the retirement fund’s protection from creditors is no longer valid.

For most individuals with a retirement fund who are claiming bankruptcy, the retirement fund is safe from creditors under federal law. Since state law also applies to bankruptcy proceedings, an individual should consult an experienced bankruptcy attorney in their state of residence.

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