In the U. S. the 401(K) is defined as an employer-sponsored retirement plan that will let the employee put aside savings that will get an exemption for tax until they decide to withdraw it. On average 401(k)contains around $89,000 in funds. Now, when you are filing for bankruptcy, it is only natural that you will think about the effect it on this retirement fund. Our experienced Pittsburgh bankruptcy lawyer is here to explain this to you.Can 401(k) Plan Become an Exempt in Filing for Bankruptcy?
The common misconception that people have is that while filing for bankruptcy, you will lose your assets including your car, home, belongings, and funds. Though it is partially true, yet the debtor while filing for chapter 7 and chapter 13 bankruptcy, you will get to opt for the exemptions that will be offering you protection for your assets. This can be particularly helpful for those debtors who are addressing the issues of their debts early.
While many other states do not offer an exemption to the debtors, Pennsylvania offers the chance for the debtor to choose between federal and state exemptions. And according to both state and federal exemptions, the debtor can get exempt on their tax-exempt retirement plan that can include 401(k). In fact, for this exemption, there is no financial capping or limit for the fund.Retirement Plan Protected by ERISA
Retirement plans including 401(k) are largely protected because of the ERISA, the federal law that came to effect in 1974. This is called Employment Retirement Income Security Act. Not only 401(k), this law protects many other types of retirement plans.
- 403(b)s is a TSA or tax-sheltered annuity plan. This is meant for the employees of nonprofit organizations including churches and schools.
- A defined benefit plan or popularly known as the traditional pension is also protected by this law. The amount the employer will get after retirement will depend on the salary they used to get while working.
- Keogh plans are the type of pension for self-employed individuals and unincorporated businesses. This is structured as a defined benefit and defined contribution plan.
- Money Purchase Plans are defined contribution plans that allow the employee to get a defined amount every year.
- Profit-sharing plan allows the contribution to be allocated in different accounts for the employees.
While the retirement plans like 401(k) enjoy uncapped exemptions, IRAs and Roth IRAs are actually subjected to the limit of $1,245,475 a person. If the employee has any fund that is beyond the amount, it will be subjected to liquidation for paying the creditors. According to the ruling of U. S. Supreme Court in June 2014, IRAs are not considered to be the retirement plans in the truest sense. The U. S. Bankruptcy Court doesn’t define the retirement funds. And that is why IRAs cannot be considered as retirement plans as they can be inherited and used for different purposes.
For more questions and doubts, talk to our Pittsburgh bankruptcy lawyer. Come to Pittsburgh Bankruptcy Law Group right away.
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