If I File for Bankruptcy, What Happens to My IRA?

By Carron Nicks, Attorney
In a bankruptcy case, you could lose some property to your creditors. But your IRA is almost certainly safe.

When you file a Chapter 7 or a Chapter 13 bankruptcy case, you probably don't need to be concerned about whether you’ll lose some of your retirement funds to the court. With one exception, all of your retirement accounts and pension plan funds, including your IRA, will be safe.

You Can Protect Most IRAs and Retirement Accounts in Bankruptcy

Under federal law, IRAs and most (tax-exempt) retirement accounts cannot be taken to pay your creditors in bankruptcy. The laws that protect these assets from your creditors are called federal nonbankruptcy exemptions (you can use them in bankruptcy). Your state will likely provide similar protections.

You should be aware, however, that the amount you can protect in a traditional and Roth IRAs is capped at $1,283,025 (as of May 2017—this amount is scheduled to adjust in 2019 due to the cost of living.) If you have more than one traditional or Roth IRA, the exemption limit applies to all the funds in those accounts combined, not individually.

Other retirement accounts are protected by federal exemptions no matter how much they’re worth as long as they qualify under the Employment Retirement Income Security Act (ERISA). These accounts are entirely protected, with no maximum limit:

  • IRA (SEP and SIMPLE)
  • 401(k)
  • 403(b)
  • Keogh
  • profit-sharing plan
  • money purchase plan, and
  • defined benefit plan.

Keep Your IRA Funds in the IRA Account

If you’re planning to cash your IRA, take a distribution, or withdraw money from any of your retirement accounts shortly before or during your bankruptcy case, you should discuss the plan with your bankruptcy lawyer or one who understands how retirement accounts work. Moving that money into a deposit account, like your regular savings or checking account strips the retirement funds exemption that you’ll need to protect the resources. The transferred amount won’t be protected from the bankruptcy court unless the cash qualifies under another federal or state exemption (which is unlikely).

With no exemption to protect it, the bankruptcy court can reach any portion of the withdrawal. You won't be able to defeat the court by redepositing the money or converting it into another type of exempt property. In a Chapter 7 case, you’ll turn the funds over to a bankruptcy trustee for the benefit of your creditors. In a Chapter 13 case, that money will be a factor in calculating how much your plan payments will be. You can count on them being substantially higher—or, if the cash available to you is significant, the court might find that a Chapter 13 case isn’t warranted because you have funds to pay your bills.

Think Hard Before Using IRA Funds to Pay Dischargeable Debt

People struggling with overwhelming debt often look to IRAs and other retirement funds as a ready source of cash they can access to pay down unsecured debt like credit cards and medical bills. This is almost always counterproductive and can cost you a lot of money. First, if you withdraw the money before you turn 59 ½, you’ll be assessed a penalty of 10%, and the money will be considered taxable income. Second, when you pay down debt with money from an IRA, you are wasting money you can protect in bankruptcy (the IRA) to pay a debt that would get wiped out (discharged) anyway. Before you withdraw the money, you should carefully weigh your options with an attorney or a financial professional.

IRA Deposits Before a Bankruptcy Case

It’s also not a good idea to make large or unusual deposits into your IRA before you file a bankruptcy case. People considering bankruptcy often want to do what they can to minimize nonexempt property (assets you can’t protect) that they might lose in bankruptcy. Often this nonexempt property is cash or a deposit account because most states don’t provide much of an exemption (if any) for cash.

Although the bankruptcy court tolerates a certain amount of “prebankruptcy planning,” when you liquidate nonexempt property to add to an IRA right before filing bankruptcy, expect the bankruptcy court to question the transaction and possibly force you to turn over the funds.

(Learn more about exemptions in Keeping Property Using Bankruptcy Exemptions: You Don't Lose Everything.)

Questions for Your Attorney

  • Should I withdraw funds from my IRA to pay past due mortgage payments?
  • I changed jobs, and now I have to rollover my retirement account to my new employer. Are the funds still exempt if I have to file bankruptcy?
  • Can I exempt money that I withdraw from my IRA to pay living expenses?
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