For most people, saving for retirement is a career-long effort. Unfortunately, if you face financial struggles, you may wonder whether that savings is in jeopardy. Will you have to use your retirement savings to pay your debts? Is bankruptcy an option in your situation? What should you know about the fate of your retirement accounts?
Should you use your retirement savings to pay for debts?
While it might be tempting to use the savings you have built to pay off your debts, that can be a significant financial misstep. Not only does this limit your savings, but you may also face costly penalties and taxes that can have a long-term impact on your finances.
How are retirement accounts treated in bankruptcy?
Federal law protects some individual retirement accounts (IRA) from creditors during the divorce process. The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005 protects Traditional and Roth IRAs up to a certain limit. As of 2022, this limit is $1,512,350. SEP, SIMPLE and most rollover IRAs have full protection under this law.
The Employee Retirement Income Security Act (ERISA) also protects other accounts. Exemptions under this law include many 401(k) and 403(b) accounts as well as profit-sharing and deferred compensation plans. The full value of ERISA-qualified accounts is exempt from the bankruptcy process.
As a result, much of your retirement savings may be exempt during bankruptcy proceedings. Creditors will not be able to seize these funds, and you can maintain the savings that can form the foundation of your future financial security.
If you face difficult financial circumstances, it is possible to address those debts while protecting the retirement savings you have built throughout your career. Learning more about your legal options can help you make sound financial decisions during this difficult time.
