How Does Bankruptcy Affect Your Retirement Account?

You’ve been saving up for your retirement. But then, with the pandemic and the economic downturn, you might not be able to pay your bills. You may be thinking of getting some debt relief and you may even be thinking about filing for bankruptcy. How does bankruptcy affect your retirement account?

But what stops you is the thought that your hard-earned and hard-saved money might be taken by your unpaid creditors if you file for bankruptcy. When you file for bankruptcy, your assets and properties become part of the bankruptcy estate. But you also know that not all your properties will belong to the bankruptcy estate – there are some exemptions. One of the exemptions available is for retirement accounts. 

Many Different Types of Retirement Accounts

The problem is, there are a lot of different retirement accounts. There are retirement accounts that are employer-sponsored such as 401(k) plans for employees in the private sector and 403(b) plans for public school teachers and other public sector employees. Employer-sponsored retirement accounts are those where your employer contributes to your retirement fund. 

There are also individual retirement accounts (IRAs). These are like savings accounts where you can make deposits or contributions and an investment firm or bank will invest the money for you. There are different types of individual retirement accounts. There are simplified employee pension (SEP) plans for small business owners and self-employed individuals. There are also Roth IRAs which are individual retirement plans that can be withdrawn tax-free.

Protection for retirement accounts from ERISA

A law called the Employee Retirement Income Security Act (ERISA) of 1974 has declared that all employer-sponsored retirement plans are exempt from being distributed to creditors, and are thus exempt from being included in the bankruptcy estate and exempted from distribution in bankruptcy to unpaid creditors. This means that most 401(k) and 403(b) plans are exempt.

But what about SEP IRAs and Roth IRAs?

The general rule is, if you do not pay taxes on your contributions to a retirement account, they are exempt properties in bankruptcy. The problem is, SEP IRAs and Roth IRAs are all taxed contributions. So, they usually cannot be exempt from being taken by creditors in bankruptcy. 

However, in 2005, the federal government included SEP IRAs and Roth IRAs as well as simple IRAs traditional IRAs. However, the entire account is not exempt. Only a portion of the account is exempt from bankruptcy laws. As of today, all SEP, Roth, Simple and Traditional IRA accounts are exempt up to $1,362,800.00. 

Ceiling of protection for IRAs

This means that if you have been regularly making contributions to your IRA and your investments have been paying off through the years, and your contribution plus earnings are over the exempt ceiling of $1, 362, 800.00 what ever is over the ceiling will NOT be exempt in bankruptcy. Anything less than the amount of $1,362,800.00 is safe and protected from creditors in bankruptcy. 

Ready to Speak to an Experienced Bankruptcy Attorney in Baltimore? 

If you are wondering if your retirement account is protected from bankruptcy, first, you must consider what type of retirement account you have. Your employer-sponsored retirement plan is definitely exempt. Your individual retirement account may only be partially exempt. 

Need help figuring out if you can protect your retirement account? Call us today. We can help you understand what kind of retirement account you have and we can help you understand to what extent it is protected from bankruptcy. For all your bankruptcy questions, contact us. We are here to help.