Financial planning isn’t always about champagne dreams and caviar wishes. For many, it is simply about not drowning in debts after retirement.
I recently met with a client to discuss her options dealing with significant credit card debt. She is nearing retirement and did not know how she could make ends meet on a fixed income. She was hesitant to file bankruptcy because she was afraid she would lose her IRA to creditors if she did.
Like my client, many people avoid bankruptcy because they fear losing their IRA in the process. But it is almost always a bad idea to tap IRA money to pay debts. The IRS will assess a 10%penalty and income taxes on the withdrawn money if you are not yet age 59 ½. Also, you may find yourself running short of funds later in retirement when you will likely need the money.
Michigan and federal bankruptcy law offer IRA protection from creditors in bankruptcy. A bankruptcy filer in Michigan may use either state or federal exemptions to protect an IRA while getting rid of debts.
Under Michigan law, you may protect all traditional and Roth IRAs accounts in bankruptcy, including payments or distributions from those accounts or annuities. The Michigan exemption does not extend to money contributed to the IRA made within 120 days before filing bankruptcy. Second, the exemption does not protect IRAs from an order of a domestic relations court (spousal or child support). Finally, the exemption does not protect nondeductible contributions to an IRA or annuity contract.
The United States Bankruptcy Code protects traditional and Roth IRAs accounts to a combined limit of $1,362,800 (inflation adjusted). You can have any number of accounts of any type as long as the combined total of all such accounts does not exceed the exemption limit.
If the IRA consists of funds rolled over from an employer sponsored account, such as a 401(k) or 403(b), the dollar limit does not apply. The rollover funds will retain the unlimited protection under federal law.
The federal IRA exemption would work better for my client. Her IRA isn’t that large, and the federal exemptions for her other assets are more attractive than the Michigan exemptions.
You must consider many factors in making a decision to file bankruptcy. If you are at the point where you are considering an IRA withdrawal to pay down debts, bankruptcy may be the better option.
If you are struggling with debt and looking for a solution, give us a call, I can help you.