Bankruptcy And Retirement Accounts

When facing financial difficulties, individuals in distress may view their retirement accounts as a convenient source of funds, using retirement money and hoping it can spare them from resorting to Chapter 7 or Chapter 13 bankruptcy filings to regain control over their debts.

Retirement accounts typically enjoy protection in bankruptcy, safeguarding them from being utilized to settle outstanding debts.

Nevertheless, it’s important to note that certain accounts have exemption limits, and withdrawing money from retirement funds before filing for bankruptcy can have potential ramifications.

Exemption Limits for IRAs (Individual Retirement Funds)


Under the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), both Traditional and Roth IRAs are protected, subject to a limit of $1,512,350 per person.

This limit applies to the total value of all IRA accounts combined rather than to each account. If the combined value of your IRAs exceeds the allowed amount, the surplus may be utilized to repay your creditors.

When Does The IRA Exemption Limit Change?


The exemption limit is adjusted every three years to account for the cost of living, with the subsequent adjustment scheduled for 2025.

ERISA-Qualified Retirement Plans: Understanding Their Protection in Bankruptcy


ERISA-qualified retirement accounts are protected and offer robust protection in bankruptcy proceedings.

 According to federal law, these retirement plans are not considered part of the bankruptcy estate and cannot be seized by the appointed bankruptcy trustee. 

Whether you file for Chapter 7 or Chapter 13 for bankruptcy protection, your ERISA-qualified retirement funds are not at risk of being lost.

What Are ERISA Plans?

If you’re unfamiliar with ERISA-qualified plan plans, they are defined benefit plans established by employers, adhere to specific IRS guidelines, and enjoy tax-exempt status.

Some examples of ERISA-qualified retirement plans include 401(k)s, 403(b) or profit-sharing plans, 457(b) deferred compensation plans, governmental plans, and tax-exempt organizational retirement plans.

An additional advantage of ERISA plans is that, under federal law, there is no limit to retirement age or the amount of protection they repay creditors. Your retirement assets in these plans are safeguarded from creditors, offering you peace of mind.

If you’re unsure whether your retirement plan falls under the category of an ERISA-qualified account, it’s advisable to consult with your employer for clarification.

Protecting Your Retirement Account When Filing Bankruptcy: What You Need to Know


Withdrawals from tax-deferred retirement accounts are subject to regular income taxation.

Additionally, if you are younger than 59½ years old, you may be liable for a 10% early withdrawal penalty.

Moreover, once you withdraw funds from your retirement account, they are no longer safeguarded in a bankruptcy proceeding.

Chapter 7 or Chapter 13?

This could affect your eligibility for Chapter 7 bankruptcy through the means test or inflate your income in Chapter 13 bankruptcy.

Before pursuing this route of filing for bankruptcy, it is essential to determine whether filing for bankruptcy is the most suitable course of action for your family member and specific circumstances.

Consult With A Bankruptcy Lawyer


It is highly advisable to consult with a bankruptcy attorney in your local area before filing for bankruptcy. They possess the expertise to guide you through the complex federal, state, and local bankruptcy law and other federal laws and regulations, ensuring the optimal protection of your retirement assets.

They can also assist in adequately reporting your retirement income, including Social Security benefits. Furthermore, an expert bankruptcy attorney can help you explore alternatives to bankruptcy if applicable.

Taking money out of your pension or retirement account to address debt may initially seem like a viable option to mitigate the impact of bankruptcy. However, it is crucial to thoroughly explore your options with an attorney before making any decisions.

Protecting IRA Balances During Bankruptcy


Substantial exemptions are in place to safeguard IRAs in bankruptcy cases. Federal bankruptcy exemptions offer protection for IRA savings up to a limit of $1,512,350. This amount is periodically adjusted every three years.

When an individual possesses multiple IRAs, the exemption limit applies to the combined value of all the accounts rather than each account.

What Happens To My IRA If I Am Married?


When married individuals file for bankruptcy jointly, both spouses can claim the total exemption amount individually. The exemption applies equally to traditional IRAs, Roth IRAs, and other investment accounts.

Individual Retirement Accounts (IRAs) differ from 401(k) plans in that they are established and managed by individuals rather than employers.

Unlike ERISA-qualified plans, IRAs are not obligated to adhere to ERISA regulations, which means they do not enjoy the same unlimited federal bankruptcy exemption. However, there are exceptions to this rule.

Certain IRAs, such as Simple IRAs, may qualify for ERISA protections. Additionally, if you roll over an ERISA-qualified account, such as a 401(k), into an IRA, the account may still be eligible for the ERISA exemption in the context of bankruptcy.

Withdrawn Retirement Benefits

When it comes to retirement savings accounts, like an IRA, they are typically protected in the bankruptcy code. However, if you decide to withdraw money from your retirement account and put it into your regular checking account, those funds lose their protected status.

If you deposit the funds into a separate account, they are generally protected but still not considered exempt from bankruptcy.

It’s important to note that this rule is different regarding Social Security retirement benefits. Social Security income remains exempt if you keep it in a separate account.

This is because you can choose when and whether to withdraw funds with a retirement savings account.

What Do I Do With My Social Security Payments?


In contrast, Social Security payments are automatically deposited into your account by the government each month, and they maintain their exempt status as long as they are kept in a separate account.

So, while retirement savings accounts can lose their exemption if you withdraw funds, Social Security benefits are typically protected as long as they are kept separate from bank accounts in monthly payments.

In conclusion


When contemplating bankruptcy, it is crucial to comprehend its comprehensive impact on your financial situation, particularly regarding your retirement savings.

While existing retirement funds are generally shielded from bankruptcy, it’s essential to be aware of certain limitations and exceptions.

The specific type of bankruptcy you file for and your employer’s policies regarding bankruptcy filing can also influence your ability to make additional contributions to your retirement plan during the bankruptcy proceedings.

Consider these factors with a bankruptcy attorney that will help you understand how they may affect your retirement savings.