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Is my retirement protected during bankruptcy?

On Behalf of | Aug 3, 2021 | Bankruptcy

Starting over with bankruptcy is daunting. But do you have to start completely over with retirement?

Thankfully, due to federal regulation, your retirement assets can remain secured through the financial storm.

Federal protection for IRAs

In 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) was signed into law which added protection for IRAs during bankruptcy.

The law is modified for inflation and currently protects assets in IRAs to $1,362,800 per person.

This does not mean all accounts up to that $1.3 million are protected. The law extends its protection for the net amount saved per person, the sum of any Traditional or Roth IRA accounts held by an individual. Protections over $1.3 million are not protected by law but can be secured if the bankruptcy court decides your case merits it.

What other retirement assets are protected?

The federal government only recently extended IRA protections from creditors. Employment-sponsored retirement options have been protected by federal law by the Employee Retirement Income Security Act. This includes plans such as:

  • 401(k)s
  • 403(b)s
  • Profit-sharing plans
  • Defined benefit pension plans

These plans, in addition to IRAs, are protected from being sold off by a trustee to settle bankruptcy debts.

Federal protection is only extended to plans protected under BAPCPA and ERISA. This does not guarantee other investment assets, such as real estate, investment accounts or savings accounts, are protected.

Some protected retirement plans can lose their protection if you make an early withdrawal from the account. The courts preserve retirement accounts to be used later. If you are using your retirement accounts as income now, these assets may be seized and distributed as well.

Protection in retirement

There are many protections of funds saved for retirement by the federal government. If you are currently considering bankruptcy but don’t know what to do about your retirement accounts, you can rest assured that your future is still protected.