A debt buildup in your older years may leave you little choice but to file for bankruptcy. This allows you the chance to discharge your burdensome debts. Still, you may worry that creditors will still come after your 401(k) to pay your outstanding amounts.
The good news is that the federal government has instituted strong protections for 401(k)s in bankruptcy. The chances of you losing any amount of your 401(k) are likely to be small.
ERISA protections
A defined contribution plan is a retirement account that you provide part of your paycheck to. At a specific time, you will be eligible to receive payouts from the plan. Your employer may also match your contribution, helping to build your account for your eventual retirement.
Defined contribution plans include a variety of accounts, including a 401(k) and a 403(b). There are also multiple 401(k)s that qualify, such as a traditional 401(k), a safe harbor 401(k) and an automatic enrollment 401(k).
Under the Employee Retirement Income Security Act, the government grants defined contribution plans special protections from creditor attempts to take control of them. Since an ERISA plan is not a liquid asset, a creditor cannot sell it to recoup debts during bankruptcy.
Possible ways to lose 401(k) assets
401(k) money can be vulnerable under special circumstances, generally if you owe money to the federal government. Such amounts often include delinquent income taxes, fines and other penalties. However, state governments are unlikely to make claims for similar debts. Also, if you get a divorce, a qualified domestic relations order could split your 401(k) between you and your spouse.
In most situations, a 401(k) is safe from creditors. Since the idea behind bankruptcy is not to leave you destitute, it is possible to keep most, if not all, of your retirement money as you seek to restore your financial health.