Since IRAs and 401ks are Protected in Bankruptcy, Should We Invest in Ourselves?

As Halloween goblins fade and we start to look at what we have left to do this calendar year, one thing our Boston bankruptcy clients ask after we inform them that they can protect their IRAs and 401ks in bankruptcy, is how they could or should invest their retirement savings.

First and foremost, we want to remind folks that these funds were designed by Congress as retirement vehicles. The reason they are tax deferred is to encourage investments NOW for taxable withdrawals LATER during retirement. They were not designed as savings accounts for cars, boats, horses or houses. Sure, some 401k plans allow for loans, however, those loans should only be taken out very cautiously. Furthermore, if the loan is not paid back before you leave or are discharged, there is an immediate payback requirement in most programs; if you can’t pay it back, you will owe taxes and penalties.

We have seen too many folks file for personal bankruptcy after using their retirement account to pay for some of their debt, only to find out that they ran out of retirement monies, but there is still debt. These folks sometimes owe the taxes and penalties which are not easily discharged. Had they come to a personal bankruptcy lawyer ahead of time, we could have undertaken bankruptcy planning and likely saved the whole retirement account, protected it in bankruptcy, and discharged all of the debts.

Another concern we have is that there is increased marketing for bizarre and risky investments in 401ks and IRAs. One new scheme by promoters is to induce folks to quit their job and start a new company. The new company has a 401k plan. You roll the 401k plan from your prior company into the new company’s 401k plan, and lend all of the money to the company. This is great if you are willing to undertake extreme risk. Think about it. You have now lost your job; spent your entire retirement savings; and started a business. Notwithstanding what you hear by the politicians, not all small businesses succeed. And, the costs associated with these promoters are very large.  Just ask the IRS. They call these plans ROBS, or Rollovers as Business Start Ups. An IRS study in 2009 proved they are largely doomed.

IRA accounts can be just as foolishly invested. You can invest your IRA with Vanguard, Schwab or Fidelity and you likely have choices of multiple stock, bond or money market funds. You can even invest in speculative things such as gold. However, there are promoters out there who have a better idea for your “self-directed” retirement funds: they include personal real estate, farm animals, land and commodities. Sounds juicy, but this is retirement.

Remember the old way: Social Security? Safe, not risky. While the high finance guys may be able to take this risk, our clients should not. While some gals may get rich here, the vast majority will not. Again, this is where the promoters make money, and the regular folks lose everything.

Consumer debt is dischargeable in Massachusetts personal bankruptcy. Don’t tap into your retirement account to pay bills, buy a car, or even invest in a house. Seek professional advice first. We offer a free consultation. Call Attorney Neil Burns at 617-227-7423.