What Happens to My 401(k) If I Go Personally Bankrupt?
The money you save for retirement in your workplace 401k plan enjoys certain federal protections from bankruptcy judgments.
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Significance
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When you file for bankruptcy, most of your assets are subject to creditors' claims. One asset that cannot be touched, however, is your 401k plan. Your 401k plan is protected under the Employee Retirement Income Security Act of 1974, also known as ERISA. This law prevents any of your 401k retirement account from being secured in a judgment against you.
Benefit
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The benefit of 401k plans is that you won't have to worry about rebuilding your retirement savings if you go personally bankrupt. The 401k plan is protected whether you work for your employer or whether you are retired. As long as the money remains in the 401k plan, it's safe. Additionally, any transfers or rollovers to a new 401k plan are protected.
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Disadvantage
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The disadvantage to 401k plans is that withdrawals may not be protected. Once you withdraw the money, your creditors may be able to make a claim against your retirement savings in the amount of your withdrawal. Whether this is allowed depends on the state where you live and the particular details of the judgment. In addition, if you owe any money to the Internal Revenue Service, your 401k has no protection at all. The IRS may take any action, up to and including a seizure of your entire 401k, to satisfy a tax debt.
Consideration
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Before filing for bankruptcy, consider making payment arrangements with your creditors. Even if you have to file for bankruptcy, your 401k plan may not be protected when it comes to withdrawing money from the plan. However, credit counseling and payment negotiation plans may preserve your ability to withdraw money from your 401k plan during retirement.
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