How Bankruptcy can Affect your Retirement Account

Individual Retirement Accounts (IRAs) are probably the commonest retirement benefit investments utilized in the U.S. because their savings can grow as tax-deferred investments until retirement. In a time where the prospect of bankruptcy is being debated in many financial forums, one should understand how a potential bankruptcy can affect their retirement account, especially the ones such as the IRAs which are considered substantial investments.

In this regard, the Federal Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) seems to be an important piece of legislature which protects most IRA funds from debtor claims as in the case of personal bankruptcy. However, it should be noted that, the same act makes it tougher for a person declaring bankruptcy to protect their other assets from debt claims.

Thus, under this law, investments worth up to one million US dollars residing in traditional IRAs and Roth IRAs will be exempted from ones bankruptcy state. Furthermore, a bankruptcy court might even consider a larger amount as being exempted depending on various other factors. When considering the funds in simple IRAs and SEPs, the protection will be unlimited. As a rule, the federal law, which is the BAPCPA, protects only the assets earned by the person declaring bankruptcy or the ones which has been contributed by his or her employer.

At the same time, industry experts points out that, employer retirement plan rollovers such as 401(k), 403(b) or profit sharing plans would also be excluded from claims made by one’s creditors. These exceptions may not be hindered by the state in which one reside, the amount of the investment, nor by the growth of these assets.

However, there are two types of retirement assets which will not be covered through federal laws and these are the withdrawals made from an IRA before the age of 59½ and the IRAs inherited to the person declaring bankruptcy. However, in such instances, especially in the event of inherited IRAs, state laws will determine the level of protection.

At the same time, one should realize that, to gain the benefits of debtor protection, one needs to file a personal bankruptcy or face the judgment made by a state court in relation to the amount of protection that can be given to such funds.

Thus, in instances where bankruptcy becomes imminent and the threat of losing on life’s savings becomes extensive, one needs to obtain the advice of a lawyer and proceed with filing for personal bankruptcy, if it is the best option that is on the table.