401k Retirement Accounts and Bankruptcy

When you’ve made sacrifices by putting away money for retirement, you don’t want to worry that you’ll lose it if you file for bankruptcy. Learn about the protections afforded to 401(k) and ERISA-qualified retirement accounts, including how the bankruptcy court will treat your 401(k) balance, and strategies to help you maximize the total amount of property you keep in bankruptcy.

401(k)s and Other Retirement Accounts in Bankruptcy

The purpose of bankruptcy law is to help get filers back on their feet financially, not to make life more difficult. So filers aren’t stripped of all belongings. Filers keep the things needed to maintain a home and employment.

Filers can also keep most tax-exempt retirement accounts, including 401(k)s, 403(b)s, profit-sharing and money purchase plans, IRAs, and defined-benefit plans. However, traditional and Roth IRA protection is capped at a combined total of $1,711,975. These protections apply in both Chapters 7 and 13. (11 U.S.C. § 522(b)(3)(C), (n); amount valid April 1, 2025, to March 31, 2028.)

Preserving 401(k) and ERISA-Qualified Retirement Accounts Before a Bankruptcy Filing

The benefit of this protection is that you can file for bankruptcy without jeopardizing your nest egg. To maximize the assets you’ll have after bankruptcy, avoid doing these things before you file:

• Don't cash out your 401(k). Not only will the funds lose protection once you’ve placed them in another account, but it would be wasteful to use the money to pay bills you can erase in bankruptcy.
• Don't use the 401(k) to stay afloat. Paying off debt with a 401(k) loan you can repay over time can be an excellent way to avoid bankruptcy. But paying penalties to cash out a 401(k) are steep, so using the funds for living expenses, especially when bankruptcy is inevitable, is often a bad idea. You’d likely be better off filing for bankruptcy earlier and keeping your 401(k) intact.
• Talk to a lawyer before moving money shortly before bankruptcy. Moving cash or a savings account balance that isn’t protected in bankruptcy into your 401(k) shortly before filing might seem like a good idea, but it can get you into trouble. The trustee appointed to oversee your case could suspect fraud if it appeared that you intended to avoid paying creditors.

Protect More Than Your 401(k) Account in Bankruptcy

Federal law excludes ERISA-qualified retirement accounts from your bankruptcy estate entirely, so long as the funds remain in the qualified account. Keep in mind that many state exemption systems offer retirement protections in addition to the federal protections discussed above.

You'll need to protect your remaining property with federal or state exemptions. (11 U.S.C. § 541(c)(2).) Also, if you choose the state bankruptcy exemptions, you can use the federal nonbankruptcy exemptions, too, which is important because the federal nonbankruptcy exemptions cover a wide range of federal retirement programs.

This checklist can help with bankruptcy exemption planning.

1. Create a property list. List everything you own. To make it easier, group smaller items together. For instance, you might want to include silverware, cookware, and dinnerware under “kitchenware.” Also, remember to include nontangibles, like investment accounts and copyrights. You can review the Schedule A/B: Property bankruptcy form for property category examples (you'll find it at the end of the article).
2. Check your state exemption law. Are you limited to the federal nonbankruptcy exemptions and your state exemptions? Or does your state allow you to use the federal bankruptcy exemptions instead? Verify your options.
3. Evaluate available exemptions. Compare the assets you own to the state and federal nonbankruptcy exemption lists. Do the same thing using the federal bankruptcy exemptions if available. Select the exemption system that will protect the most property or the property most important to you.

Keep in mind that in Chapter 7, filers lose property not covered by an exemption. In Chapter 13, filers pay for nonexempt property in the Chapter 13 payment plan.