Can You Lose Your 401(k) by Filing Bankruptcy?
A 401k is a tax-advantaged retirement account that is generally protected from creditors if you are sued. However, under certain circumstances, your protections may be limited.
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Type
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There are two types of 401k plans, and they are both protected from bankruptcy. A traditional 401k plan is a plan which is set up with your employer and accepts pretax contributions. Money is invested in the plan and grows tax-deferred until withdrawn, at which point it is taxed as income. A Roth 401k plan is also set up with your employer. Contributions are made on an after-tax basis. Money is invested and grows tax-free with no taxes paid on withdrawals.
Significance
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The significance of 401k protections from creditors in a bankruptcy proceeding is that your retirement savings is not taken from you if you cannot pay your debts and file for bankruptcy. These protections arise under the Employee Retirement Income Security Act, better known as ERISA, that excludes retirement accounts from judgments and allows you to continue investing in the plan as you normally would.
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Rollover Protection
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You may also rollover your 401k assets into another 401k, and your money will continue to be protected from creditors during the process. However, if you roll your 401k into an IRA, it is only protected up the the IRA protected limits, which is $1 million.
Withdrawals and Tax Liens
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While assets are protected while they remain invested in the plan, depending on the state you live in, withdrawals from your plan may not be protected from creditors. Additionally, these protections do not extend to IRS tax liens. The IRS may seize up to 100 percent of your 401k plan to satisfy a tax debt you owe.
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