Most people are familiar with the laws that protect 401(k) plans from bankruptcies and insurance that protects individual deposit accounts from bank failures. But are there any federal protections for individual retirement accounts (IRAs)? The short answer is yes.
The Employee Retirement Income Security Act (ERISA) protects 401(k) plans from employer and employee bankruptcies and the Federal Deposit Insurance Corporation (FDIC) insurance protects up to $250,000 in individual deposit accounts from bank failures.
For IRA holders, there are limited protections in place through the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). Before its enactment, IRA holders relied solely on state law to shield their assets.
Subscribe to Kiplinger’s Personal Finance
Be a smarter, better informed investor.
Save up to 74%
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more – straight to your e-mail.
Profit and prosper with the best of expert advice – straight to your e-mail.
Now, the extent of the protection will be dictated by what type of IRA you have and the statutory maximum amount of IRA funds that can be excluded from a bankruptcy estate. As the number of bankruptcies rise, understanding the protections your IRA enjoys can give you some leeway to reorganize your finances.
How many people have filed for bankruptcy?
Total bankruptcy filings rose 14.2% in 2024 from 2023. Non-business, or individual bankruptcies, rose 13.9% to 494,201, compared with 434,064 in 2023, according to statistics released by the Administrative Office of the U.S. Courts.
The Consumer Bankruptcy Project (CPB) found that the median age of those filing for bankruptcy was 49. And people 65 and older filing for bankruptcy have become the fastest-growing demographic group over the past 20 years. This group has grown from 4.5% of bankruptcy filers in 2001 to 18.7% of filers by 2022. This is partially a result of the growing number of people 65 and older in the U.S., which increased 38.6% between 2010 and 2020, according to Debt.org.
Why are people filing for bankruptcy? In one survey, 78% of respondents cited a decline in income as a reason for their bankruptcy, and 65% reported that their bankruptcy stemmed from medical debts and missed work due to illness.
Protections for IRAs under BAPCPA
Knowing if your particular IRA account is protected is important because not all retirement accounts share the same type of creditor protection. This is becoming a more pressing concern as the number of people filing for bankruptcy is rising generally and the number of people filing over age 65 has grown substantially.
ERISA provided federal bankruptcy protection for 401(k) plans and traditional pensions before the passage of BAPCPA. Previously, IRA protections were defined at the state level, if at all. After the law’s passage in 2005, IRA account holders in every state were afforded some form of bankruptcy protection for their assets.
When you apply for bankruptcy, you are required to liquidate your assets to repay your creditors. If you file for a Chapter 7 or a Chapter 13 bankruptcy, certain property is exempt from entering the estate. These estate exemptions are typically governed by state law, but the federal bankruptcy code does include an exemption list for states that do not have their own. This estate, a collection of your nonexempt assets, is used to repay your creditors.
Limits on IRA protection. For 2025-2028, under BAPCPA, Roth and traditional IRAs balances are exempted from the bankruptcy estate up to $1,711,975. That is an increase of $199,165 from $1,512,350 and goes into effect on April 1, 2025. This exemption amount is subject to cost-of-living adjustments (COLAs) and is adjusted for inflation every three years. Any amounts over the limit will be included in the petitioner’s bankruptcy estate.
Remember that the $1,711,975 does not include funds rolled into the IRA , such as from a 401(k). Former employer plan dollars remain 100% protected from bankruptcy within the IRA and do not reduce the $1,711,975 cap.
Rollovers from employer-sponsored retirement plans. Eligible rollover distributions retain the unlimited bankruptcy protection given to them while held in the exempt retirement plan if they are contributed to another eligible retirement plan within 60 days of distribution. Earnings on the rollover assets are protected as well. However, in non-bankruptcy situations, state laws apply to IRA assets, including rollover IRAs.
Inherited IRAs. If you file for bankruptcy and have an inherited IRA, those funds can be taken by creditors. This is true even though retirement funds are often exempt in bankruptcy filings. The protection does not apply when you inherit an IRA, except in one case — when you inherit from a spouse.
While you may read that the status of inherited IRAs is unclear, in June 2014, the U.S. Supreme Court ruled unanimously, 9-0 in Clark v. Rameker, No. 13-299 (U.S. 6/12/14), that inherited IRAs are not protected in bankruptcy under federal law; upholding a Seventh Circuit decision, that said inherited IRAs do not enjoy the protections of IRAs in bankruptcy proceedings.
Type of Account | Bankruptcy protection | Legal liability protection |
Roth IRAs | Aggregate protection up to $1,711,975 | State law protections if any, only |
Traditional IRAs | Aggregate protection up to $1,711,975 | State law protections if any, only |
SEP IRAs | Unlimited protection | State law protections if any, only |
SIMPLE IRAs | Unlimited protection | State law protections if any, only |
Non-bankruptcy situations
In non-bankruptcy situations, assets held in ERISA plans are fully protected under the anti-alienation provision of the law. This provision prevents the assignment or transfer of pension benefits to third parties, ensuring funds are protected for retirement. That is not the case for IRAs; for anything other than a bankruptcy, state law determines whether IRA assets will receive protection from creditors’ claims. And many states have strong creditor protections for IRAs, SEPs, and SIMPLE IRAs.
Neither BAPCPA nor ERISA provide absolute protection from all claims. Exceptions apply to: federal criminal fines, back taxes and penalties, court orders related to divorce, child support and qualified domestic relation orders (QDROs).
Bottom line
The enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) put IRAs out of the reach of bankruptcy creditors and gave account holders a way to protect their retirement funds in hard times. Always remember, that any qualified retirement plan or IRA, including traditional, Roth, rollovers, SIMPLE or SEP IRAs, may be subject to an IRS tax levy. The government rarely puts your money beyond reach.
Employees in qualified retirement plans protected by ERISA should consider the degree of creditor protection when deciding to keep their accounts under an ERISA plan or rolling over accounts to an IRA. If you want to move the money out of a former employer’s plan, you can move it into your new 401(k) retirement plan and keep the bankruptcy and creditor protections afforded by ERISA.
Related Content
Source link
:max_bytes(150000):strip_icc()/METAchart-99f481bf94ce43acb4c177acde4ff1bb.gif?w=390&resize=390,220&ssl=1 "Meta Stock Rises as Company Unveils Plans to Introduce WhatsApp Ads—Watch These Key Levels")
