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Robin D.
Robin D., Senior Tax Advisor 4
Category: Tax
Satisfied Customers: 15303
Experience:  15years with H & R Block. Divisional leader, Instructor
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I recently got a letter from a previous employer that is

Customer Question

Hi there I am Jeff. I recently got a letter from a previous employer that is offering me a lump sum payment. I didn't even know about this. The problem I have is that I am currently on Medicaid and receive food stamps and supplemental income. I am also working with social security to obtain disability status. I owe creditors on previous medical bills and credit cards. Can I protect these funds from creditors?
Submitted: 1 year ago.
Category: Tax
Expert:  Robin D. replied 1 year ago.


It sounds like this may be from a pension or retirement account.

If you are paid a lump sum form a tax deferred account (has not been taxed yet on the contributions) the distribution to you would be taxable unless you rolled it over to another tax deferred account (like an IRA).

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) exempts retirement plan assets from a debtor's bankruptcy estate if such assets are held by:

a. an Internal Revenue Code §401(a) tax-qualified retirement plan,

b. a section 403(b) plan,

c. a section 457 plan, or

d. an IRA (including traditional IRAs, Roth IRAs, SEPs and SIMPLEs) under §§408 or 408A. 11 USC §522(d)(12).

It is the debtor’s burden to show that the funds in a retirement plan account are qualified, not the creditor’s burden to prove that they are not.

Customer: replied 1 year ago.
Not much help. Canned answer. No help with disability
Expert:  Robin D. replied 1 year ago.

I did not think it was canned. I really did not know yet what the lump sum was in relation to. I had to rely on my experience and did give you general info until you could come back and advise if this was retirement or not.

Is it retirement? You did not advise yet exactly what this is for.

Expert:  Robin D. replied 1 year ago.

You asked "Can I protect these funds from creditors?" All my info pointed to yes if this payment is from retirement.

Customer: replied 1 year ago.
it's a settlement from my retirement plan from Revlon. I didn't even know I had. Can I take this settlement and use the money to help my current situation? I know that I would pay the 20 percent penalty that's ok. But I would want to keep the disability payment and the other payments I get. I'm wanting the lump sum because I may not live until I'm 67 1/2.
Expert:  Robin D. replied 1 year ago.

Thank you for clarifying.

If you keep the money you would be taxed based on the amount (they may withhold 20% but that is not the end) you receive. You will need to file a tax return and report the distribution.

You will not have a penalty if you are classified as disabled.

All the assistance you are receiving will be impacted by this lump sum. The amounts you are receiving based on your low income will be recalculated and if this is a goodly amount you will not receive that assistance.

The disability is not yet effected as you have not been classified as disabled.