Why a Large IRA May Not Be Protected from Bankruptcy

For most people, an IRA is protected by bankruptcy. Federal bankruptcy laws state that retirement accounts such as an IRA or Individual Retirement Account cannot be liquidated during the bankruptcy process to repay creditors. However, this measure of protection extends only to those who have what is considered a normal level of retirement investment. If you have too much in your retirement account, creditors can attempt to seize those funds to repay your debts.

History of Retirement Protection

A traditional, employer sponsored retirement plan, such as the 401k offers protection from creditors. This has been a long standing law. Creditor judgments cannot access funds from this type of retirement account. If your retirement funds are in this type of account, they are protected. However, IRA’s have not had this level of protection. It wasn’t until the establishment of the 2005 law called the Bankruptcy Abuse Prevention and Consumer Protection Act that federal law established protection for IRA’s specifically.

How Much Is Too Much?

According to the 2005 law, an IRA is protected by bankruptcy claims as long as the funds within the account are under $1 million. At least $1 million in your IRA assets will be protected from creditor claims if you file bankruptcy. However, there are a few considerations here.

Roth IRA’s may not be afforded the same level of protection as traditional IRAs.
State laws may be different from federal laws.
There is some dispute over what the language of this law means in terms of rollover funds. In most cases, funds you have rolled over from employer-sponsored programs will be protected, but some experts believe the language of this law is not clear on that point.
If you have unpaid IRS tax liens, these funds may not be protected.
Any fraud or embezzlement of funds to retirement accounts may be subjected to confiscation. Do not try to add or misuse funds in these accounts to protect them from creditors.

Overall, most will find that bankruptcy laws protect their assets within their IRA. Even balances over $1 million may be protected assuming that the bankruptcy court does not rule those funds excessive.

Seek Legal Advice

When filing bankruptcy, your assets are critical to your financial future. You will want to protect them the best way possible in your unique situation. You should not hide assets, nor misrepresent them. It is best to use an attorney to help you through the process to ensure that your assets are protected according to the letter of the law, even in your IRA or other retirement accounts.

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