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How may bankruptcy protect retirement accounts?

Financial problems can strike anyone, even people in their older age. As someone nearing retirement, you may worry about creditors claiming your retirement accounts. Fortunately, senior citizens can avail themselves of the bankruptcy system and possibly hold on to their retirement savings.

One of the important features of bankruptcy is being able to exempt assets, including retirement accounts. This means creditors cannot claim them to pay off debts. Both state and federal laws have their own bankruptcy exemptions.

Federal exemptions

Many retirement accounts receive full protection from creditor claims under federal law. Examples include your 401(k) or your 401(b) account. Your pension or your profit-sharing plan can also be exempt.

Depending on how much you have saved in a Roth or traditional IRA, you may fully exempt your IRA as well. Federal law caps exemptions in these accounts at $1,512,350. However, other IRAs such as SIMPLE IRAs and many rollover IRAs have no exemption caps.

State exemptions

Like other states, Texas law exempts assets from creditor claims. In fact, Texas exemptions are more generous than federal exemptions when it comes to retirement accounts.

Under state law, many retirement accounts such as IRAs and 401(k)s receive complete exemption. State bankruptcy protections apply to many other defined benefit plans. Examples include pensions for school teachers, police officers, firefighters and other state and county workers. Other retirement accounts and survivor benefits for government employees may also receive protection.

Remember that bankruptcy should help you restore your financial health, not deprive you of your retirement money. The exemption provisions of bankruptcy show that federal and state law can protect your retirement as you seek to unburden yourself from your debts.


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