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Bankruptcy and Retirement Savings: Answers for a Secure Financial Future

Posted on in Bankruptcy

Bankruptcy, as defined by LendingTree, LLC, the nation's leading online lender exchange, is a complicated situation that can open the door to a personal or business “do-over” without the burden of insurmountable debt but not without possible financial consequences.

It may be easy to briefly define bankruptcy but for those facing the reality, the situation can raise numerous questions, especially when it involves your Roth IRA.

A Roth IRA, established by the Taxpayer Relief Act of 1997 permits taxpayers, subject to certain income limits, to save for retirement basically tax free. Taxes are generally paid on contributions while withdrawals, under certain limitations, are generally tax free and are not governed by age limits, differing from the Traditional IRA.

If you are considering bankruptcy, your number one priority should be scheduling a consultation with an experienced bankruptcy attorney in your area to learn more about your options and the amount of risk you face, especially when it involves your retirement nest egg. In the meantime the following Q & A section may provide a few answers.

Will My Roth IRA Be Compromised If I File Bankruptcy?

No. A Roth IRA is protected from judgments and disallows any creditor collection action providing you with a safe harbour for your retirement savings. However, if a judgment is placed against you, you may have to relinquish any withdrawals made against the account. The determining factor depends upon your state laws to determine the validity of a true Roth IRA and its protection during bankruptcy proceedings.

Does the Value of My Roth IRA Come Into Play?

Yes. If your Roth IRA is valued at $1 million or less you are protected from your creditors. Even more so if the debt you owe is written off as bad debt you may be able to secure the total amount of your Roth IRA. Payment of income tax on the total debt may be required and the debt cannot be collected in the future.

Does the Exemption Cover Federal Tax Liens Levied by the Internal Revenue Service?

No. If your Roth IRA is valued over $1 million and the IRS is one of your creditors, all exemptions are ified. Any outstanding tax bills must be paid. The IRS can also place a federal tax lien against your retirement account. Depending upon your tax liability, this could wipe out your Roth IRA leaving you with a zero balance.

Do I Have Options?

Yes. To avoid bankruptcy, credit deterioration and possible compromise of your retirement savings, consider working with your creditors to reach a fair and manageable payment arrangement. Even if your creditors do not include the IRS be reminded that once you make a withdrawal from your Roth IRA you may be required to provide your creditors with a portion or even all of the proceeds. If your debt situation does include the IRS consider negotiating a payment plan to prevent the IRS from seizing your Roth IRA to secure a path to a secured retirement.

I Have More Questions, Who Has the Answers?

Yes. If you are faced with delinquent debt and believe that filing for bankruptcy is your only option for a fresh financial start, an experienced bankruptcy attorney is the best course of action for determining if it is truly your only recourse. An attorney, knowledgeable of your state's as well as federal law should be your first step toward achieving your financial foothold on your future as well as your options for protecting your retirement reserve.

The experienced team of lawyers at Newland & Newland, LLP can answer your questions, by taking a comprehensive review of your financial situation to clearly define what may be the best course of action. Proudly serving Cook, Lake, DuPage, McHenry, Kane and Will Counties contact us for your free phone consultation to get the answers you deserve.

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