IRAs have some level of protection during a bankruptcy, depending on what type they are. Every three years, the federal government adjusts the value of your account that you can protect to keep up with inflation. The first adjustment for inflation was on April 1, 2007.
Partial protection
If you have a traditional IRA or a Roth IRA, then around $1,512,350 of its value is safe in a bankruptcy. This number applies to the total value of your traditional and Roth individual retirement accounts rather than to each account. In some situations, a bankruptcy judge could extend the protection amount for more of your IRA.
Full protection
SIMPLE IRAs, SEP IRAs and most rollover IRAs have full protection during a bankruptcy. For a rollover to qualify for full protection, it must come from an eligible retirement plan under the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005. Examples of qualified retirement plans include 401(k)s, traditional pensions and certain profit-sharing plans. You might want to keep a rollover in a separate account to make it easier to discern how much of the funds came from a different retirement plan.
Exceptions
The IRS may have access to your IRA funds that would have otherwise been safe during a bankruptcy. If a court convicts you of a crime, then the federal government might freeze your IRA or seize part of it. Another possible exception to protection is if a creditor is your former spouse.
IRA withdrawals during the bankruptcy process aren’t protected. You might want to avoid making withdrawals until the bankruptcy is final. If you don’t, then creditors may be able to claim the assets for repayment of your debts. Some bankruptcy cases prohibit withdrawals and borrowing against your IRA. You could face a legal fee for withdrawing or borrowing.
Most people with IRAs can protect these funds from creditors during bankruptcy. This level of protection largely depends on what type of account you have. Other factors include the identity of your creditor and your criminal record.
