Wait! Wait! Don’t Touch That IRA!
When your debts start to mount and your income is drying up, you start to shake the sofa
cushions for loose change and break into the kids’ piggy banks. You do what you gotta do, right?
And then you remember that you have an IRA (or 401K or pension, etc.) and think your problems are
solved! But wait! Is that the answer?
Well, it depends.
Before you borrow against your 401K or take a withdrawal from an IRA, you need to know an
important fact: MOST RETIREMENT SAVINGS ARE EXEMPT ASSETS IN A BANKRUPTCY. What does that
mean? Basically, if you file bankruptcy, your retirement savings cannot be taken by the trustee and used
to pay creditors. In most instances, the exemption is unlimited and the entire amount is protected; with
IRA’s, the exemption is capped at over $1,000,000.00. Therefore, you will be able to receive a
bankruptcy discharge of all your debts and keep whatever amounts you have in your retirement
Of course, this is the law that we are talking about so there is small print. As an initial matter,
not all retirement savings are protected. The protected savings include 401(k)s, 403(b)s, IRAs, Keoghs,
profit-sharing plans and defined benefit plans. What is not protected is money simply stashed in a
savings account or investment account. Those monies could be taken by a trustee in your bankruptcy to
pay your creditors.
An additional caveat to the retirement savings exemption is that you cannot simply dump all
your funds into an exempt retirement account immediately prior to filing bankruptcy. Your financial
transactions in the run up to a bankruptcy filing are closely scrutinized by the bankruptcy trustee and
can be “undone” if they determine them to have been fraudulent. So you have to be careful and begin
bankruptcy pre-planning as early as possible.
Knowing that your retirement savings may be exempt in bankruptcy will allow you to make a
more educated decision as to whether you should actually dip into that IRA or 401(k). Where you are
young and don’t need the retirement funds for a while and the withdrawal will completely resolve your
debt, it might be the right decision. However, if you’re older and need the funds soon and the
withdrawal won’t resolve your debt issue completely, you might want to think twice and consider
As always, take advantage of your our offices free, initial consultation and sit down with an
experienced bankruptcy attorney before you make such a major financial decision. Bankruptcy may or
may not be the best option for you but choosing to have all the information is always the right decision!