Indianapolis Bankruptcy Lawyer Answers Reader’s Question: Can I Withdraw Money From My 401K …

One of my Bankruptcy in Indiana readers posed a question that actually comes up quite frequently in one form or another in consultations at the Zuckerberg bankruptcy law offices.

Since the question begins with “Can I…”, the answer is technically “Yes.”  But, should you? The answer is almost certainly “No, not if you can help it.” 

The reader asks whether she is allowed to withdraw money from her 401K plan after having filed personal bankruptcy in Indiana.

The reason that’s not going to be a good idea for her is this:  401K money is an exempt asset, meaning it does not need to be used to pay creditors. (That exemption goes for any qualified retirement plan, including 403-B tax-deferred annuities for teachers, government retirement plans, and even IRAs.)  In fact, in recognition of my work as a long time debt consolidation lawyer and Certified Consumer Bankruptcy Specialist offering bankruptcy services in Indiana, I was asked to help write the exemptions portion of the new bankruptcy laws of Indiana. 

The point of all this is, the readers’ 401K money is exempt as long as it stays inside the retirement plan. Were she to make a “hardship withdrawal” out of the 401K, or even borrow against it, the bankruptcy trustee would insist that the money be used to pay unsecured creditors. That means that debt that might actually have been discharged in the bankruptcy would now need to be paid by the debtor (our readers). On top of all that, withdrawals from 401K are taxable in the year withdrawn, so the withdrawal would add to our reader’s problems! 

Any of the good bankruptcy attorneys in Indiana would offer the same advice to readers and clients:  Whether you’re filing under Chapter 13 bankruptcy law in Indiana or filing bankruptcy Chapter 7 in Indiana, the exemption for retirement money is a precious gift not to be squandered. Bankruptcy in Indiana is rooted in federal bankruptcy law, which is very careful to preserve retirement plan savings for people’s later years. Tax law, of course, favors retirement savings, allowing money to grow tax-deferred.

So, while the answer to our Bankruptcy in Indiana reader’s question “Can I?” might be yes, the best Indiana bankruptcy help I can offer is a big “No, don’t!” when it comes to withdrawing retirement plan money.

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