A recent article by Reuters reported on the growing number of people who are withdrawing funds from their retirement accounts in order to make it through the economic downturn.

It seems that 22% of all participants in Fidelity Investments have loans or withdrawals against their 401(k) accounts.  Loans and withdrawals against 401(k) Plans are highest amongst workers between 35 and 55 years of age, which should be an individual’s peak earnings and savings years.

This means that U.S. citizens are tapping into their 401(k) Plans to meet their daily living expenses as well as to prevent foreclosures or creditors’ actions.

Additionally, unemployment benefits have been running out and unemployed workers are seeking income from their 401(k) Plans.

As I have repeated on numerous occasions, under the Bankruptcy Code, 401(k) Plans, IRA’s, and pension or profit sharing plans are exempt from a bankruptcy case.  Therefore, a debtor can keep unlimited funds in these protected accounts even though they are filing for a Chapter 7 or Chapter 13 bankruptcy.

The bottom line is that many of my clients come to me after years of trying to settle their debt, or cover their basic living expenses by withdrawing tens of thousands of dollars from their 401(k) and IRA’s.  This is a real shame.

Emptying your 401(k) account is a step toward insolvency.  Filing a bankruptcy case is a step toward financial solvency.  A well-planned bankruptcy case will allow a client to erase most if not all of his credit card debt, unload an unwanted car lease or second mortgage, and preserve his pension and retirement accounts in full.  All bankruptcy debtors are also allowed $50,000 equity in their home (for each spouse), and/or $5,000 in the bank.  (Legislation is currently pending in Albany to increase these allowances to $150,000 of equity for each spouse and $10,000 in the bank.)