Will I Lose My 401(k) or IRA in Bankruptcy?
Your 401(k) or IRA can grow to a very large amount. Our clients frequently ask us the same question – will I lose my 401(k) or IRA in the bankruptcy case? No, you will not usually lose your 401(k) or IRA in your bankruptcy case. These accounts are almost always “exempt” which means that they are protected during bankruptcy. Only rare situations will make them not fully protected during bankruptcy.
Federal and State Exemption Make You Not Lose Your 401(k) or IRA
Both federal and state exemptions will almost always protect the entirety of your 401(k) or IRA account during bankruptcy. Exemptions are items or amounts protected during a bankruptcy filing from the trustee or creditors. You will get to keep these accounts because lawmakers have agreed that protecting retirement is very important. These legislatures provided exemptions to protect tax-deferred, tax-exempt retirement accounts such as a 401(k) or IRA.
You will need, however, to check with an attorney to make sure the entirety of your 401(k) or IRA will be protected. This is because there are rare situations where a 401(k) or IRA will not be protected. These rare, non-protected situations are usually based on either unusually large retirement accounts or non-normal transactions that result in IRA or 401k funds.
Losing Part of an IRA in Bankruptcy by Going Over the Limit
You may be able to lose your IRA funds in bankruptcy in some states if you exceed a certain maximum limit. The most common combined limit of all accounts that must be surpassed is currently at approximately $1,512,350. However, this maximum limit may only apply to IRA accounts in certain states. It is important to check with your attorney if you have very large, combined IRA or 401(k) balances to make a good prediction on whether it will be protected. Remember, however, it may be very possible all of your accounts will be protected even when such an amount is all together exceeded.
Losing Funds Recently or Unusually Contributed to an IRA or 401(k)
IRA or 401(k) accounts that were funded right before bankruptcy was filed may allow a portion of the account to be recovered by the bankruptcy Trustee. This means that it might be a very bad idea to make an unusual contribution to a retirement account within 6 to 12 months before filing for bankruptcy. The concept behind this is simple. The bankruptcy court will find it unfair that you made a large contribution to your retirement account instead of paying your creditors.
In addition, amounts contributed to 401(k) and IRA accounts that exceeded annual maximums may also be subject to seizure by the Trustee for creditors in bankruptcy. Although it is rare, sometimes 401(k) or IRA accounts are not generated in ways that follow federal guidelines for such accounts. Any unusually generated account may be vulnerable during bankruptcy.
Some Retirements are Safe in Bankruptcy
You Will Lose Inherited IRA or 410(k) Accounts in Bankruptcy
In bankruptcy court, it has been held in the past that retirement accounts inherited from relatives who have passed away are not protected in bankruptcy. Therefore, if you have a 401(k) or IRA that was originally another family member’s account, you are very likely vulnerable to losing it in bankruptcy. Make sure to tell your bankruptcy attorney this information as it may not be discernible just by a general interview or a glancing through account statements.
