IRA Protections: Federal Law Protects Retirement Accounts During Bankruptcy

TRI Writer • March 24, 2020

In most cases, bankruptcy petitioners can keep retirement accounts like 401ks and IRAs when filing for Chapter 7 bankruptcy. Still, federal law places a cap on the amount eligible for protection on some accounts. In rare cases, retirement accounts could be accessed by the bankruptcy trustee to pay creditors.

ERISA and Non-ERISA Qualified Plans:

Bankruptcy law provides different types of protections for retirement accounts, depending on whether the account is an ERISA (Employment Retirement Income Security Act) qualified plan or a non-ERISA plan. ERISA qualified plans are established by the employer, adhere to specific IRS guidelines, and are tax exempt. IRAs (Individual Retirement Accounts) are the most common type of non-ERISA plan, but all non-ERISA plans are included under BAPCPA’s umbrella of protection. If you aren’t sure if your retirement account is an ERISA-qualified plan or a non-ERISA plan, ask your employer.

You Don’t Have to Worry About ERISA-Qualified Plans During Bankruptcy:

The United States Supreme Court ruled that ERISA-qualified retirement plans are not property included in bankruptcy and cannot be taken by the bankruptcy trustee to pay creditors. Therefore, you don’t need to worry about your ERISA-qualified plan during Chapter 7 bankruptcy. Some common types of ERISA-qualified plans include 401(k)s, 403(b) or profit-sharing plans, 457(b) deferred compensation plans, governmental plans, and tax-exempt organizational plans.

Another Advantage of ERISA-Qualified Retirement Plans:

ERISA-Qualified retirement plans offer another significant advantage. They are protected up to the cap determined by federal law. Any assets that fall within the cap, cannot be lost during bankruptcy. This is important not only to those filing bankruptcy now, but to individuals considering tapping their retirement accounts to pay off debt that is eligible for bankruptcy discharge. It’s relatively common for consumers to consider accessing retirement funds to pay off debt to avoid declaring bankruptcy, yet doing so should be considered only as a last resort. It is best to step into a fresh financial start after bankruptcy with retirement funds still in place.

What About Non-ERISA Qualified Plans?

Non-ERISA retirement accounts also enjoy protections offered by federal bankruptcy law. Common types of non-ERISA qualified plans include IRAs, Roth IRAs, SEP-IRAs (for owners of small businesses), Simple IRAs (for the self-employed), and similarly structured retirement plans.

What Protections Are Offered Traditional and Roth IRAs?

Unlike ERISA plans, traditional and Roth IRA protections are capped at $1,362,800 if the case is filed after April 1, 2019, and before March 31, 2022. The cap applies to multiple accounts, so if you have more than one traditional or Roth IRA, only $1,362,800 of the combined total can be protected (the protected amount is not per account). Any amount between the accounts that surpasses the cap is available to the bankruptcy trustee when repaying creditors. The federal cap is adjusted for inflation every three years with the next adjustment scheduled for April 1, 2022.

When Do Federal Protections for Retirement Accounts Not Apply?

In some instances, the federal protections for retirement account balances do not apply. For example, once money is withdrawn from a retirement plan, it is no longer protected by the federal exemption. The IRS may also be able to access retirement assets if there is a valid tax lien against you. Divorcing spouses may also gain access to retirement accounts in certain situations.

Do you have questions about bankruptcy law and retirement accounts? The experienced Tennessee and Georgia bankruptcy attorneys at Kenneth C. Rannick P.C. can help. We help good people through bad times every day, and we can help you, too.

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