Retirement Accounts and the TSP in Bankruptcy: What Is Protected

You have spent years putting money into the Thrift Savings Plan. Now the debt is out of hand, and you are afraid bankruptcy means handing that money over.

For most people it doesn’t. Employer retirement plans, including the TSP and FERS and CSRS pensions, are generally protected in full, in DC, Maryland and Virginia alike. The bigger risk is what people do with that money before they file.

Is my TSP protected in bankruptcy?

Generally, yes, all of it. The Bankruptcy Code protects retirement money held in tax-exempt retirement plans, and that protection has no dollar limit for employer plans like the TSP.

Federal law adds a second layer. Money in the TSP is not subject to garnishment, levy or other legal process, with narrow exceptions for things like child support, alimony and federal taxes.

It works the same in all three places. Most exemptions, the laws that decide what you keep, depend on where you live, and I cover those in protecting assets in bankruptcy. The retirement exemption applies whether you use the DC, Maryland, Virginia or federal list.

What about my FERS or CSRS pension?

Protected. Federal law says FERS and CSRS benefits cannot be assigned to anyone else or reached by garnishment, levy or other legal process, apart from narrow exceptions.

In practice, a Chapter 7 trustee, the court officer who looks for property to sell for creditors, has nothing to sell in your pension.

Once the money is paid out, keep it traceable. If you are retired, deposit your annuity into an account where it is not mixed with other money. That makes it easy to show where the balance came from.

Are 401(k)s and 403(b)s protected?

Yes, on the same terms as the TSP. That covers a 401(k) from a private-sector job before or after federal service, a 403(b) from a school or nonprofit, and a 457 plan from a state or local government job.

Moving money keeps the protection. A direct transfer from one plan to another, such as from an old 401(k) into the TSP or an IRA, does not cost you the exemption.

The same is true of a rollover check, as long as the money goes into the new account within 60 days. Money that sits in your checking account past that point is just cash.

Are IRAs protected?

Yes, up to a limit. Traditional and Roth IRAs are protected up to a set amount that is adjusted periodically, and it is high enough that most people never come close.

Some IRA money does not count toward that limit at all:

• Rollovers. Money you rolled into an IRA from a 401(k), the TSP or another employer plan, plus its earnings.
• SEP and SIMPLE IRAs. These employer-sponsored IRAs are not subject to the limit.

A court can also raise the limit when the interests of justice require it.

Is an inherited IRA protected?

Usually not under the federal retirement exemption. In Clark v. Rameker, the Supreme Court held that money in an inherited IRA does not count as “retirement funds” for the bankruptcy exemption.

That surprises people, because the account still says IRA. If you inherited an IRA from a parent or anyone else, tell me before you file. Whether anything else protects it depends on which exemption list applies to you and how the account is set up.

What happens to a TSP or 401(k) loan?

A loan from your own retirement plan is not treated like a credit card.

• The payroll deductions keep going. The automatic stay, the court order that stops most collection when you file, does not stop deductions that repay a TSP or 401(k) loan.
• Bankruptcy generally does not wipe it out. You are still repaying your own account.
• In Chapter 13, the loan stays as it is. The plan cannot materially change the loan’s terms, and the repayments are not counted as money available to pay creditors.

What happens when the loan is paid off in the middle of a Chapter 13 plan varies by court and trustee. Some trustees expect the freed-up money to go into the plan, so I look at the payoff date before setting the payment.

Can I keep contributing during Chapter 13?

Often, but check first. The Bankruptcy Code gives special treatment to retirement contributions withheld from your pay, and those contributions are generally not counted as money available for creditors.

Courts do not all agree on how far that goes, especially if you start or increase contributions after filing. I check how the court and trustee in your case handle it before setting your budget.

Why is cashing out before filing a mistake?

This is one of the most expensive mistakes a federal employee can make, and it usually happens months before the first call to a lawyer.

You turn protected money into unprotected cash. The day the withdrawal lands in your bank account, it is no longer in a retirement plan, and the retirement exemption no longer covers it.

You create a new tax bill. Most withdrawals are taxed as income, and taking money out before age 59 and a half usually adds a 10% additional tax unless an exception applies.

That new tax survives bankruptcy. A tax year that recent fails the three-year, two-year and 240-day timing tests, so it stays with you after the case.

The debts were dischargeable anyway. The credit cards and personal loans you paid with retirement money are usually the debts bankruptcy would have wiped out. Borrowing from the TSP to pay them is no better: you still owe the loan, and protected money went to debts you could have discharged.

If you already took money out, tell me how much, when, and where it went. If it is still within 60 days, putting it back into a retirement account may restore the protection.

What should I do right now?

If you are a federal employee, retiree or contractor with debt you cannot pay, call me at (202) 448-5136 before you withdraw or borrow anything. Bring your latest TSP statement, any retirement loan statement and a list of your accounts.

If you already have a bankruptcy case open, call the lawyer handling it first. If a lost job or furlough is behind the debt, here is what I tell federal employees facing a job loss.

The consultation is free. I handle bankruptcy in DC, in Maryland at the Greenbelt courthouse, and in the Eastern District of Virginia.

Don’t wait. The retirement money is usually safe until you move it.