Despite what you may hear, bankruptcy is not the end of your retirement savings. When you know how bankruptcy impacts your retirement, you can take a proactive approach to planning for your future.
Depending on the type of bankruptcy protection you file for and the type of retirement accounts you have, you may have different rights and protections.
Your 401(k) and IRA
If your employer sponsors your 401(k) you should inform them of your bankruptcy filing. According to The Motley Fool, ask your employer if the Employee Retirement Income Security Act or ERISA protects their 401(k). If their plan qualifies for protection, your 401(k) remains untouched during your bankruptcy proceedings. If their plan does not qualify for protection under the ERISA, you receive protection for up to $1,362,800 of your savings. At some point, your bankruptcy could affect any savings exceeding that amount.
Traditional and Roth IRA accounts are a bit more vulnerable in a bankruptcy. You have guaranteed protection for up to $1,362,800, but other funds could feel the impact of your filing. Keep in mind that any money you withdraw from your retirement accounts during your bankruptcy is not protected.
Planning for the future
Even as you begin the bankruptcy process, start planning for your future. Refrain from the temptation of withdrawing from retirement accounts to get back on your feet. Establish a savings plan and focus your effort on developing healthier spending habits and reinforcing your financial security.
Because your retirement assets are relatively untouched during most bankruptcy scenarios, do everything in your power to protect their integrity beyond that. Your efforts to maintain and boost your retirement savings can give you a leg up on recovering from bankruptcy and put you on the path of a successful financial future.
