The most-popular blog post I’ve ever written is the one about insolvency and taxation of canceled debt. That post generates a lot of follow-up questions, one of which is: what does “interest in a retirement account” mean?
Taxpayers who might be insolvent can fill out the insolvency worksheet in Publication 4681 to determine if they are indeed insolvent.
“Insolvent” means your debts are larger than your assets. In the asset section of the insolvency worksheet, on Line 28, there’s an item that says “Interest in retirement accounts.”
A common question from readers of my post about insolvency is: does the term “interest” mean “interest earned” in the account? What if my account has lost money recently?
Interest Means “Stake”
In this case, the term “interest” means “stake.” For example, if your 401(k) account has a balance of $15,000, you have a $15,000 “interest” in that account.
This is true regardless of how much “interest” the account has earned through the years.
Same word, but different definitions.
You’d put $15,000 on Line 28 of the insolvency worksheet.