Types

• There are two types of 401k plans that are protected from bankruptcy. First, the traditional 401k plan allows pretax contributions to the account and taxes withdrawals during retirement. A Roth 401k plan, by contrast, accepts only after-tax contributions to the account and does not tax withdrawals made during retirement.
  
  

Significance

• The significance of the protections offered to 401k plans by the Employee Retirement Income Security Act, called ERISA, for bankruptcy is that your retirement cannot be secured by a creditor for the satisfaction of a debt owed by you. Your creditors may be able to take any money that you withdraw from your account, depending on the state laws where you live and the court ruling in your bankruptcy proceeding.
  
  

Benefit

• The benefit of the ERISA protections for your 401k is that you won't have to rebuild your retirement savings. If you file for bankruptcy late in life, then it would make it difficult to rebuild your savings if creditors could secure your retirement account for the payment of debts. This would mean you'd have to work for longer than you had originally planned.
  
  

Disadvantage

• The disadvantage to creditor protections for a 401k plan is that if the creditor is able to take the withdrawals from your 401k plan, then you won't have an income to live on during your retirement. Your 401k plan balance will be protected, but it won't matter, since you won't be able to use any of the money in your 401k. Additionally, if you convert your 401k plan to an IRA, your protected amount is limited to $1 million. This means that any dollar amount in your IRA over $1 million may be secured by a creditor for the payment of your debts.