While many people with debt issues are tempted to cash out retirement accounts to resolve their debt issues. It is generally a big mistake. Cashing out retirement accounts to pay unsecured debts, such as credit cards, is throwing good money after bad. Tax-deferred retirement accounts, such as 401Ks, IRAs, 403(b)s Keoghs, profit-sharing plans, money purchase plans, and defined benefit plans are exempt under Florida Statute Annotated §222.21. Exemptions are protections that prevent a creditor from accessing an asset for payment of a debt owed. Exemptions also protect an asset in bankruptcy from a bankruptcy trustee liquidating the asset to pay the debtors’ creditors.
Once the retirement funds are cashed out and sitting in a bank account, the funds lose their exempt status and are no longer protected. In plain terms, your retirement is now a sitting duck for creditors. The funds are up for grabs for creditors seeking payment or a bankruptcy trustee looking for assets for paying creditors and administrative expenses. It does not matter that the funds are traceable to the retirement accounts. It only matters that the funds no longer qualify for the exemption.
Retirement funds are not untouchable as there are exceptions to every rule. There are exceptions to the unlimited retirement account exemption under Florida law for the Internal Revenue Service who may be able to access retirement accounts to satisfy a valid tax lien and ex-spouses who may be able to access retirement accounts as part of divorce proceedings.
Before you decide to cash out retirement talk to an attorney who is experienced with asset protection planning!
