Can You Keep Your Retirement Accounts in Bankruptcy?

Updated: April 2, 2019
Under most circumstances, you can keep your retirement accounts, such as 401ks and IRAs, if you file for Chapter 7 bankruptcy. However, federal law caps the protected amount for some accounts. And, in a few situations, your retirement accounts might not be safe from the claims of the bankruptcy trustee and your creditors.

ERISA v. Non-ERISA Qualified Plans

The type of protection the law provides for your retirement account depends on whether it’s an ERISA (Employment Retirement Income Security Act) qualified plan or a non-ERISA plan.

• ERISA-qualified plans. An ERISA plan is established by an employer, meets certain IRS guidelines, and is tax exempt.
• Non-ERISA-qualified plans. The most common type of non-ERISA plans are IRAs (Individual Retirement Accounts). These plans are also included under BAPCPA’s umbrella of protection.

If you’re not sure which type is provided through work, check with your employer.

ERISA-Qualified Retirement Plans

You don’t need to worry about ERISA-qualified accounts in bankruptcy. The United States Supreme Court ruled that an ERISA-qualified retirement plan isn’t property that’s included in bankruptcy and can’t be taken from you by the bankruptcy trustee appointed to your case. Examples of ERISA-qualified retirement plans include:

• 401(k)s
• 403(b) or profit sharing plans
• 457(b) deferred compensation plans
• governmental plans, and
• tax-exempt organizational retirement plans.

Another major advantage of these types of plans is that they’re protected up to an unlimited amount. You don’t have to worry about losing any of these assets to your creditors.

Bankruptcy Tip: It isn’t unusual for someone to try to avoid bankruptcy by using retirement funds, only to file for bankruptcy later. Because you won’t lose this type of retirement account in bankruptcy, it’s rarely a good idea to dip into one to pay for debt that can be discharged (eliminated) in bankruptcy. Consider doing so only as a last resort. Emerging from bankruptcy with your retirement in place will help you make the most of your fresh start.

Non-ERISA Qualified plans

Federal bankruptcy law also protects non-ERISA retirement accounts. Non-ERISA plans include:

• IRA’s
• Roth IRA’s
• SEP-IRA’s (for small business owners)
• SIMPLE IRA’s (for self-employed individuals), and
• similar retirement plans.

Unlike ERISA plans, the protection for traditional and Roth IRAs is capped at $1,362,800 for cases filed between April 1, 2019, and March 31, 2022. If you have more than one traditional or Roth IRA, you can only protect $1,362,800 combined (not per account). The bankruptcy trustee will be able to take any amount over $1,362,800 to repay creditors. The cap is adjusted every three years for inflation and will adjust again on April 1, 2022.

State vs. Federal Bankruptcy Exemptions

The retirement exemptions are part of the federal bankruptcy exemptions. States can "opt-in" and use the federal bankruptcy exemptions or “opt-out” and use their own state exemptions.

However, federal law affords equal treatment of exemption claims of retirement funds to all Chapter 7 and Chapter 13 bankruptcy filers. Therefore, whether you live in an opt-in state or an opt-out state, the federal retirement bankruptcy exemptions apply to your bankruptcy case. For all other property, it’s important to know whether the federal or state exemptions will apply.

Find out more in Bankruptcy Exemptions.

Some Retirement Accounts Aren’t Protected

Although retirement accounts are generally safe from your creditors when you file for bankruptcy, there are a few exceptions.

• Once you withdraw money from a retirement plan, the federal exemption no longer protects it.
• The IRS might be able to reach your retirement assets with a valid tax lien against you.
• Divorcing spouses might have access to your retirement accounts.

Learn more in What Happens to Bank Accounts, Pensions, and Retirement Funds in Bankruptcy?