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Special Rules for Retirement Accounts

You may be surprised to learn that you can protect over 1million dollars of assets in retirement accounts when you file for bankruptcy.
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Updated: 2020-08-01
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Special Rules for Retirement Accounts:

Under the 2005 bankruptcy law, virtually all types of pension and retirement accounts recognized by the IRS are completely exempt regardless of what state you live in.

This provision exempts "retirement funds to the extent that those funds are in a fund or account that is exempt from taxation under Sections 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code."

This list covers 401(k)s, 403(b)s, profit-sharing and money purchase plans, IRAs (including SEP and SIMPLE plans), as well as defined-benefit plans.

The exemption applies whether you rely on the list of federal bankruptcy exemptions (11 U.S.C. 522(d)(12)) or the exemption laws of your own state (See 11 U.S.C. 522(b)(3)(C)). Section 522(b)(4) spells out the specific requirements for qualifying under these provisions.

These exemptions are unlimited, except for Roth and traditional IRAs, which are capped at an aggregate IRA account value of $1,283,025  per individual (adjusted every three years for inflation). (See 11 U.S.C. 522(n))

SEP and SIMPLE IRAs, along with all other types of non-IRA retirement accounts such as 401(k)s and 403(b)s, are completely exempt.

More Info

For more details, see an excellent summary of how retirement accounts are treated under the new bankruptcy law from the August 2005 issue of the Journal of Financial Planning.

References to the Internal Revenue Code

The new bankruptcy law exemption for retirement accounts includes all funds "exempt from taxation under section 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code of 1986."
Those sections cover:

  • 401 (a qualified pension, profit-sharing and stock bonus plan created under a trust established by an employer for the exclusive benefit of employees or beneficiaries)
  • 403 (qualified annuity plans that are established by an employer for an employee under IRC 404(a)(2) or 501(c)(3))
  • 408 (IRAs)
  • 408A (Roth IRAs)
  • 414 (other retirement plan for controlled groups of employees such as churches, partnerships, proprietorships, and governments)
  • 457 (eligible deferred compensation plans) or
  • 501(a) (retirement plans established and maintained by tax-exempt organizations, e.g. churches, nonprofit organizations)

Special 'exclusion' of education accounts

Under the new bankruptcy law, education savings accounts or education IRAs created under sections 529 or 530 of the Internal Revenue Code are 'excluded' from the bankruptcy estate (not quite the same as 'exempt' but with the same result).

See, 11 U.S.C. 541(b)(6), (529 Education Tuition Plans) and 11 U.S.C. 541(b)(5) (530 Coverdell IRAS)

NOTE: Even though these education accounts are excluded from the bankruptcy estate, you still must list them on your forms (See section (11 U.S.C. 521(c).)

Also excluded are:

  • benefits governed by ERISA (Click here for government info on ERISA and pensions.)
  • 414(d)(governmental retirement plans),
  • IRC 457 (deferred compensation)
  • 403(b)( tax deferred annuity plan including church plans, etc)

See 11 U.S.C. 541(b)(7)


You may also be interested in:

  • Common Exceptions to Exemptions:

    Many states exemption laws do not protect property from certain kinds of creditors claims, such as child support, taxes, and claims of secured creditors.

  • Insurance Exemption Glossary

    Insurance exemptions use a lingo all their own and some familiarity with the jargon is essential to understanding what is exempt.

  • How do I eliminate judicial liens on exempt property?

    If there is a judicial lien on your property as a result of a court judgment against you, you may have the right to remove it if it "impairs" an exemption on the property. You must intitiate a special procedure called an "adversary proceeding." You may need a lawyer's help to do this, and you need to make ask your bankruptcy lawyer if they charge extra fees for doing this.

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