Throughout your professional career, you may have invested a portion of your salary into an employer-sponsored 401(k) account. This funded account may grow tax-free over time, and you may rely on it for a monthly (taxed) income when the time comes to retire. So you may worry that all this hard work and strategy would have been for nothing if you ultimately feel the need to give in to a bankruptcy filing. With that being said, read on to discover whether your bankruptcy case will prompt your 401(k) funds to be taken and how a seasoned Louisville, Kentucky consumer bankruptcy lawyer at Schwartz Bankruptcy Law Center can ensure you are using the right protections.

Will my bankruptcy case cause funds to be taken from my 401(k)?

According to the Employee Retirement Income Security Act (ERISA), contribution plans must be considered a protected asset during any bankruptcy case. Many types of 401(k)s are categorized as contribution plans, such as traditional, safe harbor, SIMPLE, and automatic enrollment 401(k)s. Other protected retirement plans may include ERISA plans, 403(b)s, certain Individual Retirement Accounts (IRAs), profit-sharing plans, and defined benefit plans.

Simply put, being a protected asset means your Chapter 7 bankruptcy trustee cannot liquidate these retirement plans to help pay off your outstanding creditors. Or, for your Chapter 13 bankruptcy, the judge cannot order you to use these retirement funds in your monthly repayment plan.

What are the potential penalties when using my 401(k) funds?

You may only have one outstanding creditor that you need to pay back. Or, you may only need to pay back close family members or friends who have graciously given you personal loans. With this, you may assume that petitioning for a bankruptcy case is unnecessarily complex and that using your 401(k) funds would be easier. However, be wary of the potential penalties for withdrawing from this retirement account. They read as follows:

  • You may be slammed with a 10 percent tax penalty from the Internal Revenue Service (IRS) if you withdraw funds before reaching 59 and a half years old.
  • Your withdrawn funds will be considered income and subsequently taxed as such (i.e., Kentucky has a 4.5 percent flat income tax rate).
  • You may lose your opportunity to get an employer match if you withdraw your funds early.
  • You may miss out on the inherently special protections this account offers.
  • You may inhibit this funded account from continuing to grow tax-free.

You may only avoid these potential penalties by petitioning the IRS to grant a hardship withdrawal of these funds. But then again, remember that your 401k account is altogether considered a protected asset in a bankruptcy case. So, in terms of your retirement funds alone, bankruptcy may be the wiser option.

Do not wait. Retain the services of a competent Louisville, Kentucky consumer bankruptcy lawyer from Schwartz Bankruptcy Law Center. We look forward to working with you and taking on your case.