Massachusetts Bankruptcy and 401k Law
Many of our Massachusetts bankruptcy clients ask us what will happen to their 401k accounts if they file for bankruptcy protection and a fresh start in Massachusetts.
The simple answer is that the bankruptcy law protects those monies. Whether you have $10,000 or $100,000, or millions, like a famous political candidate, it’s all protected from your creditors if you file a bankruptcy in Massachusetts.
First, let’s go over what a 401k plan is. Created in 1978 by Congress, 401k’s were originally intended for corporate executives to sock away some extra money tax free. They allow you to put a certain amount of money from your paycheck into a retirement account. Current 401k limits, as outlined in a previous our bostonbankruptcylawyer blog are $16,500 and $22,000 if you are over 50. Every dollar put into a 401k plan is not taxed – until you take it out, presumably upon retirement.
The law has been amended numerous times, however, in 2006, the Pension Protection Act allows companies that have 401k plans to require someone to opt out, rather than filling out paperwork to opt in.
Another critical feature of the way 401k plans are run is that companies are allowed to match your contribution, up to a certain amount. This is typically 3%. That amount has been criticized by many folks who study the effects of retirement law. We agree, it should be higher. However, in the mean time, Massachusetts workers should, at the very minimum, put as much of their paycheck that their company matches into their 401k plan. Why? Because it’s a 100% return on your investment!
The statistics about retirement are scary.
Many of our Massachusetts bankruptcy clients come in having just withdrawn their 401k monies, paid the tax, or worse, owing the tax. While over 3 billion dollars has been accumulated in 401k funds, not even half of the private sector workers have 410k accounts. John Bogle estimates that private and public retirement accounts are underfunded by $1.2 trillion. Given that many workers lost their homes, or at least significant equity in their homes in the recession of 2008, we have a large problem looming here. Another problem is fees: many investment companies used for 401k accounts charge fees that eat away at any gains.
It is not uncommon to see mutual funds that charge 2% of assets, or 10 times the typical low cost fund fee at Vanguard. Or even Boston’s Fidelity. John Bogle, the founder of Vanguard, points out that fees are part of the “perfect storm” because investment companies charge too much.
According to many experts, most folks should be saving “at least” 10% of their earnings, beginning in their 20s, for retirement. Social Security, even if solvent, doesn’t pay much more than the average rent in Massachusetts. Most defined benefit, or direct pension, plans are going or gone. The answer is: fully fund your 40k plan. And work on the distribution of monies between stock funds, bond funds and cash, depending on your comfort with risk and your time horizon.
Finally, what about 401k loans? We don’t recommend you do this.
You are borrowing from your future. If you lose your job, you may be required to pay it back immediately. On the other hand, it is worth noting that, as we reported earlier, 401k loans are not reported to credit agencies.
For advice on personal bankruptcy in Massachusetts, call an experienced Massachusetts bankruptcy lawyer BEFORE you take out a 401k loan, or worse, deplete your 401k account for the misguided benefit of creditors.
Call Attorney Neil Burns at 617-227-7423.