For many debtors, the treatment of retirement plans during bankruptcy is a critical consideration, as these plans often constitute a substantial portion of an individual’s assets. The degree of protection afforded to these plans is primarily determined by the type of retirement account and the specific bankruptcy chapter under which the case is filed. Please continue reading as we explore what you should know about these matters and how our knowledgeable Rapid City Bankruptcy Lawyers can guide you to your safe harbor. 

Are Retirement Accounts Protected in Bankruptcy?

First and foremost, it’s important to understand that the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) enhanced the protection of retirement plans during bankruptcy. Under federal law, certain retirement accounts are exempt from the bankruptcy estate, which means they cannot be seized by creditors to satisfy outstanding debts. The following lists the retirement accounts typically protected in a South Dakota bankruptcy case:

  • Employee Retirement Income Security Act (ERISA)-qualified retirement accounts: Those established under the Employee Retirement Income Security Act of 1974 usually receive the highest level of protection in bankruptcy. This encompasses plans like 401(k)s, 403(b)s, pension plans, and profit-sharing plans.
  • IRAs and Roth IRAs: These retirement plans also receive significant protection under federal law. However, unlike ERISA-qualified retirement accounts, which are typically 100% exempt from the bankruptcy estate, the exemption limit for IRAs and Roth IRAs is adjusted periodically for inflation. Any amounts exceeding this limit may be subject to creditors. It should be noted that this cap applies ot the aggregate value of all IRAs, not to each one.
  • SEP-IRA, SIMPLE IRA, and Most Rollover IRAs: These accounts provide the same unlimited protections as the original ERISA plan, even in cases where the IRA would typically be subject to federal limitations. This arrangement serves as an incentive for individuals to safeguard their retirement savings.

What Exemption Limits Should I Be Aware Of?

As of 2022, an exemption of $1,512,350 protects the combined IRA and Roth IRA holdings under federal law. Any amount exceeding this limit may be transferred to a bankruptcy trustee for creditor repayment. This exemption amount is adjusted triennially. As such, you should check the specific amount before filing.

It’s crucial to keep in mind that withdrawing retirement funds before bankruptcy increases income, potentially disqualifying you from Chapter 7 or raising Chapter 13 payments. These funds might also be accessible to the trustee in Chapter 7 if not essential. Therefore, you should consider waiting until after bankruptcy, especially for Chapter 7 cases.

As you can see, the specific laws surrounding retirement plans and bankruptcy are intricate. That’s why it’s in your best interest to consult with an experienced attorney at 605 Bankruptcy, who can help you determine the protections available for your retirement accounts. Connect with our firm today to schedule a consultation.