Besides being sound financial advice, maxing out your 401k or IRA contributions each year can be a boon if you run into financial trouble at some point during your prime earning years. If you want to invest in the stock or bond market, you have two options: invest in a taxable investment account with any number of brokerage firms or invest in a tax-advantaged retirement account where your capital gains will grow without accruing a tax bill along the way. There are a myriad of different retirement accounts to choose from, including a 401k, Individual Retirement Account, 403(b), and 457 plan. This is not a comprehensive guide on the differing types of retirementaccounts. IRA’s have a number of different permutations, including SEP IRA, SIMPLE IRA, Traditional IRA, and Roth IRA. 403(b) and 457 plans are typically reserved for nonprofits and government employees, respectively.
Why Retirement Accounts are Better than Tasable Accounts in Bankruptcy
The reason why investing money in a retirement account is better than having your investments tied up in traditional taxable accounts has to do with bankruptcy exemption laws. You see, when a person files bankruptcy, a “bankruptcy estate” is created that is comprised of all property belonging to a debtor as of the petition date. A Chapter 7 trustee’s job is to liquidate any non-exempt assets and distribute the proceeds to a debtor’s creditors. What do you think is one of the easiest things to liquidate? If you guessed money, stocks, and bonds, you would have guessed correctly. Fortunatately, Georgia has certain bankruptcy exemptions that “exempt” property from being seized by the trustee for the benefit of a debtor’s creditors. Most of these exemptions are relatively small in amount. For instance, a debtor can exempt up to $5,000 equity in an automobile or $21,500 equity in a house. But for retirement accounts, the exemptions are practically unlimited.
The retirement accounts that offers the greatest protection through Georgia’s exemption laws are the 401k, 403(b), 457 plan, and any pension through a debtor’s employer. ALL funds held through these accounts are exempt from the trustee’s grasp under code section 44-13-100(a)(2.1). For an individual retirement account, the Georgia code provides that payments from such accounts “to the extent reasonably necessary for the support of the debtor and any dependent of the debtor” are exempt. From a practical standpoint, I’ve never seen a Chapter 7 trustee go after an IRA, and I’ve had clients with half a million dollars in their IRA’s file bankruptcy. Just as a word of warning, inhereited IRA’s are now NOT protected in bankruptcy, so if an IRA was inhereited, the exemption laws will not protect you.