When you file bankruptcy San Diego, your retirement savings in your retirement accounts are generally protected. The 2005 Bankruptcy Code amendments created a new protection for retirement accounts. Most retirement accounts are exempt and protected in bankruptcy up to the amount of the Internal Revenue Code exemption amount. The exemption amount is adjusted every 3 years in April. It was last adjusted in April 2016. The next scheduled adjustment is in April 2019.
For 2017, the exempt amount is $1,283,025. Since most people have less than $1 million in their retirement account(s), in most cases your retirement saving is protected. When considering bankruptcy, always talk to a lawyer to find out the current amount of the retirement savings protection, as the amount changes regularly.
The protection for retirement savings extends to most type of retirement accounts that are tax-exempt, including but not limited to: 401K accounts, IRA accounts, employer established annuities and contribution plans, tax exempt pension plans and profit-sharing plans. In most cases, if the IRS treats the account as a tax exempt account, then your retirement saving in your retirement account is protected.
When you make an early withdrawal from your retirement account, or receive an early distribution from your retirement account (IRA, 401K, etc.), two important things happen: (1) you will owe taxes on the withdrawals if you did not pay income tax on the income earned at the time you deposited your retirement savings into your retirement account; and (2) you have to pay a tax penalty on the retirement savings that you withdraw prior to the age of retirement.
Therefore, it is strongly discouraged to pull money out of your retirement savings in an effort to pay off debts and get debt relief San Diego. If you absolutely need to pull out money from your retirement account to apply toward a debt, it is strongly recommended that you get the advice of a lawyer before making the retirement account withdrawal.
The IRS has several exceptions to the tax penalty. Exceptions include:
• You file bankruptcy on tax assessed as a penalty.
• You use the early withdrawal to buy, build, or rebuild a first home.
• You inherited the IRA funds from an owner who is now deceased.
• The withdrawals were used to pay medical bills.
• You set up an annuity (a series of equal payments over your life).
• You are disabled.
• And other exceptions.
If no IRS exception applies to your situation, then you can expect to receive a tax penalty on your early withdrawals or distributions from a retirement account.
The money that you withdrew from your retirement account will not be attributed as income at the time that you withdrew it for bankruptcy Means Test purposes. Instead, the funds that you withdrew will be considered as income earned at the time you were paid the money in the first place. Your retirement account distribution is treated similar to pulling money out of your savings account. The distribution is not income for Means Test purposes.
If you have retirement savings and are considering bankruptcy, or you have withdrawn money from your retirement account and you have been assessed a tax penalty for the early withdrawal, contact Bankruptcy Legal Center and talk to an experienced San Diego bankruptcy lawyer and learn how bankruptcy can help you get out of debt San Diego and get a fresh start.