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Is My Retirement Account Exempt In Bankruptcy?

  • By: Christopher Benson
  • Published: January 15, 2015

The short answer is typically “Yes.” However, there are some unique rules. If you contributed to the IRA or 401K, and the amount is reasonable to support you and your dependents and you have not made any “unusual” contribution of sums prior to bankruptcy, then you are probably fine. Consult with a bankruptcy attorney prior to making any decisions.

But, there are some unique things as well. Such as an inherited Retirement Account. For a spouse who inherits a retirement account, once again you are probably fine. However, if someone other than your spouse “gifted” the retirement account to you, the you may not. There are recent changes in the bankruptcy case law that address this issue.

Also, prior to 2005, it was not questioned that IRAs were exempt from bankruptcy. However, after the changes imposed by the Bankruptcy Abuse and Consumer Protection Act. With the new law, only tax-favored IRAs are exempt.

To fit the definition of a tax favored IRA, the owner of the account cannot take loans from the account. However, this becomes a more tricky definition when you examine the agreements that many large brokerage firms impose on their clients, including that if the IRA owner borrows money from another account at the same brokerage to buy stock on margin, the brokerage has a lien against the IRA to ensure repayment. Some Chapter 7 trustees have suggested this clause means that these IRAs are not tax-favored.

To ensure that your IRA enjoys tax-favored status, read the fine print before you file bankruptcy, and bring up this obscure—but possible—reading of the law to your bankruptcy attorney to make sure your IRA qualifies as tax favored. Contributory and Roth IRA protection is capped at $1 million, however rollover IRAs are completely off-limits to the bankruptcy court, no matter how much money is in them.

One reason you might want to take the leap into bankruptcy to save your IRA would be if you have a judgment against you as the result of a civil lawsuit. In those cases, IRAs are fair game, especially if they are funded with “after-tax dollars.”

Over the past 23 years, the Law Offices of Christopher A. Benson has helped over 3,000 of Washington clients take control of their financial situation. We can stop your garnishment and change your monthly payments for all your combined unsecured debt, and if you have had more than $600 garnished within the last 90 days, we can get all of the money back in most cases. But you have to act quickly–call (253) 815-6940 for your free consultation, or email us today. Evening and weekend appointments available.

Christopher Benson

About the Author Chris served on the Board of Directors for Habitat for Humanity
Seattle/S. King County for 10 years and served as Vice President
of the organization during part of that time. Read More