Can Bankruptcy Take Your 401(k) or IRA? Protection Guide

Retirement accounts are almost always protected in bankruptcy. Your 401(k), IRA, and similar accounts remain safe.

You might feel tempted to drain your retirement funds to pay creditors. Don’t do it. If you’re considering bankruptcy, keep your retirement assets untouched.

Withdrawing retirement money rarely solves the problem. You’ll face tax penalties and early withdrawal fees. You’ll lose savings that bankruptcy could have protected. Plus, you’ll need those funds for your future.

When you file bankruptcy, your debts get discharged. Protecting your retirement accounts ensures you won’t face this crisis again. Speak with a bankruptcy attorney for free to understand your options.

What Does Protected Mean in Bankruptcy?

In Chapter 7 bankruptcy, a trustee can seize valuable property. The trustee sells it and pays creditors with the proceeds.

Protected assets stay with you. The trustee cannot touch them. Exemptions shield specific types of property from seizure.

Your retirement accounts qualify for strong protection under federal law. You keep them while eliminating your debt burden.

Retirement Income During Bankruptcy

Already receiving retirement income? You must include it in your bankruptcy calculations.

For Chapter 7, retirement income affects your eligibility. For Chapter 13, it determines your payment plan amount.

Most people living only on retirement and Social Security payments qualify for Chapter 7. The means test evaluates your financial situation.

Retirement Income vs. Social Security

Social Security benefits receive different treatment than retirement income. Your Social Security doesn’t count as income in the means test.

The bankruptcy court excludes Social Security from calculations. Retirement account distributions do count as income.

ERISA-Qualified Plans Get Full Protection

Congress changed bankruptcy law in 2005. Any ERISA-qualified pension plan is now fully protected and excluded from your bankruptcy estate.

ERISA stands for Employee Retirement Income Security Act. These federal protections are comprehensive and reliable.

Protected accounts include:

• 401(k) plans
• 403(b) plans
• Traditional and Roth IRAs
• SEP and SIMPLE IRAs
• Keogh plans
• Profit-sharing plans
• Money purchase plans
• Defined-benefit plans

The reasoning makes sense. Bankruptcy provides a fresh start. Forcing you to lose retirement savings defeats that purpose.

You’d face financial trouble again in retirement without adequate savings. Protecting retirement accounts prevents future crises.

IRA Protection Limits

IRAs and Roth IRAs have one difference from other ERISA plans. A cap limits protection to $1,362,800 currently.

The limit applies to all your IRA accounts combined. Most people never approach this amount in personal retirement savings.

Your traditional employer-sponsored 401(k) has no dollar limit. Full protection applies regardless of balance.

Non-ERISA Plans Lack Protection

General savings accounts don’t qualify for retirement protection. Investment accounts and stock option plans also lack protection if they’re not ERISA-qualified.

Know what type of retirement accounts you have before filing. Surprises can cost you thousands of dollars.

Most traditional employer retirement accounts fall under ERISA protection. You can verify your plan’s status with your benefits administrator.

How You Can Lose Retirement Protection

Certain actions put your retirement accounts at risk. Avoid these mistakes before and during bankruptcy.

Withdrawing Funds Before Filing

Retirement accounts stay protected only when you leave them alone. Money you withdraw recently might lose protection.

The trustee can view withdrawn money as part of your bankruptcy estate. They can distribute it to creditors.

The outcome depends on the amount withdrawn and how you spent it. Basic living expenses receive better treatment than luxury purchases.

Early withdrawals trigger harsh penalties. You’ll typically pay a 10% early withdrawal penalty. The IRS taxes withdrawn funds as gross income.

Money left in your retirement account grows tax-deferred. Money you remove shrinks from penalties and loses protected status.

Preferential Transfers Create Problems

You withdraw retirement money and pay just one creditor before bankruptcy. The trustee sees this as a preferential transfer.

Maybe you paid off an aggressive creditor. Perhaps you repaid a family member’s loan. Both scenarios create problems.

Bankruptcy requires equal treatment of creditors. The Chapter 7 trustee can void preferential payments. They’ll demand the money back for equal distribution.

Timing matters for preferential transfers. The lookback period ranges from 90 days to one year before filing. Payments to family members face longer scrutiny.

State vs. Federal Exemptions

Check both your state’s bankruptcy exemptions and federal exemptions. States can offer their own exemption systems.

Some states let you choose which exemption set to use. Others require you to use state exemptions only.

ERISA-qualified retirement accounts receive federal protection regardless of state law. The 2005 bankruptcy reform made this protection uniform nationwide.

A bankruptcy attorney can clarify which exemptions apply in your state. Get a free consultation to review your specific situation.

Keep Your Retirement Accounts Intact

Don’t raid your 401(k) or IRA to appease creditors. Bankruptcy protects these accounts while eliminating your debts.

Withdrawing retirement funds creates multiple problems. You pay penalties and taxes. You lose protection. You sacrifice your financial future.

Chapter 7 bankruptcy gives you a fresh start. Your retirement plans stay protected so you can build a stable financial future.

The protection is nearly absolute for ERISA-qualified plans. Your employer-sponsored 401(k) remains completely safe during bankruptcy proceedings.