Bankruptcy and IRA Exemptions- Is There a Maximum Cap in Bankruptcy?

November 9, 2016

If you have an IRA, 401k, or any other tax-exempt, tax-deferred retirement account, your retirement accounts are almost always 100% protected in bankruptcy.   This is due to bankruptcy “exemptions” which block your creditors from taking certain types of property during a bankruptcy filing.   There is a “cap,” however, to how much you can keep in an IRA during a bankruptcy filing.

Why IRA’s or Other Retirement Accounts are Exempt in Bankruptcy

IRA’s and other retirement accounts are usually exempt during bankruptcy as a matter of public policy.  Essentially, it is extremely important that people are given the chance to save for retirement in a way that cannot be wiped out by creditors.   If no form of retirement accounts were “exempt” in bankruptcy, any wave of unfortunate occurrences could wipe out a life-time of retirement savings.  In order to be fair and create an incentive to save for retirement, exemptions for most types of designated retirement accounts were created.

Remember, most forms of retirement accounts are exempt in bankruptcy.   However, it is important that your retirement savings are held in a proper vehicle – such as an IRA, Roth IRA, 401k, ESOP’s, and a few other clear vehicles.   Generally, these and some other types of established vehicles for retirement are exempt in bankruptcy.   However, stock accounts, annuities, savings accounts, and other legitimate methods of saving for retirement are likely not exempt if they are not held in designated, retirement-oriented-type account.

How Much is the Current “Cap” for IRA Accounts?

For quite a long period of time (since 2005), the “cap” on IRA accounts exempt in bankruptcy was set at $1,000,000 with gradual increases to follow.  This was an even number that was easy to justify: $1,000,000 seemed to be a fair allowance to afford a reasonable and comfortable retirement.   The justification was that amounts beyond this point could create incentives to prepare or transfer money that were based on “bankruptcy-proofing” instead of retirement.  This exemption is outlined in Section 522(n) of the Bankruptcy Code.

However, as of April 1, 2016, the new IRA “cap” was increased to $1,283,025.  The increase is to allow for the natural growth of the exemption “cap” to mirror natural growth of accounts.  The increase is also to allot for inflation.  This cap does not apply to 401k accounts or some employer supervised IRA’s offered to employees for employer-backed retirement.

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