Can Creditors Take My IRA Rollover in Bankruptcy?

By Kevin Owen

An Individual Retirement Account is an investment account in which you can deposit after-tax dollars for retirement savings to be drawn after you reach age 59 and 6 months. You are eligible to transfer money from other retirement and pension accounts into your IRA without incurring any tax penalties or withdrawal fees in a process known as a "rollover." Depending on the type of IRA you roll over your retirement accounts into, your funds may be partially or fully protected from your creditors in bankruptcy.

An Individual Retirement Account is an investment account in which you can deposit after-tax dollars for retirement savings to be drawn after you reach age 59 and 6 months. You are eligible to transfer money from other retirement and pension accounts into your IRA without incurring any tax penalties or withdrawal fees in a process known as a "rollover." Depending on the type of IRA you roll over your retirement accounts into, your funds may be partially or fully protected from your creditors in bankruptcy.

Individual Retirement Accounts

Individual Retirement Accounts are tax-favored investment accounts that are generally divided into two types: contributory IRAs and rollover IRAs. Contributory IRAs are accounts where you continue to deposit funds into your investment account. Rollover IRAs are accounts where you transfer funds from another pension or investment retirement account, such as a 401(k) account or other employer-defined benefit pension plan, for future investment management. No new contributions can be made to a rollover account.

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ERISA Protection

The Employee Retirement Income Security Act of 1974 (ERISA) is a federal statute that provides protection of qualified employee retirement accounts from being raided by employers, forfeited by civil litigation judgments and mismanaged by investment brokers. In the context of bankruptcy, ERISA provides absolute protection for funds invested into a qualified account. Since the funds from rollover IRAs originate from ERISA-qualified accounts, such as a 401(k) or employer pension, your rollover IRA is fully protected from your creditors in bankruptcy. However, contributory IRAs do not receive ERISA protection since the funds are directly invested by you without being channeled through an employer.

Bankruptcy

Consumer bankruptcy is divided into two formats: Chapter 7, where non-exempt assets are liquidated and paid to your creditors; and Chapter 13, where you are placed on a three- to five-year repayment plan. At the conclusion of either type of bankruptcy, any remaining eligible debts are discharged and your creditors can not pursue you for further payment. In Chapter 7 bankruptcies, the law protects different types of assets from seizure by the court-appointed trustee by exempting it from your bankruptcy. Under Chapter 13, exemptions reduce the amount of money available to pay your creditors each month. IRA accounts are generally considered exempt under both Chapter 7 and Chapter 13 bankruptcy.

2005 Bankruptcy Reform

In 2005, Congress enacted the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) to curb perceived abuses of the bankruptcy process. Under BAPCPA, ERISA-qualified retirement accounts, including rollover IRAs, became wholly protected from creditors in bankruptcy petitions filed after October 17, 2005. BAPCPA also created an exemption of up to $1,000,000 for contributions into contributory IRAs. This exemption only applies to the actual contributions. Rollover funds deposited into a contributory IRA are fully protected, up to an an unlimited amount.

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Does Your IRA Survive Bankruptcy?

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IRA Beneficiary Rules

An individual retirement arrangement is a savings plan designated for retirement purposes. By designating it as retirement savings and giving up the freedom associated with typical savings accounts, individuals receive preferential tax treatment. The type of plan – whether traditional IRA or Roth IRA – will determine the timing of the tax preference. Traditional IRAs provide the account holder with a tax deduction in the year the contributions were made, while Roth IRAs do not provide an up-front deduction, but allow for tax-free distributions at retirement. Given the tax benefits, individuals may contribute to an IRA until they reach age 70 1/2.

Can a Bankruptcy Trustee Get a Joint Ownership Mutual Fund?

When you file a Chapter 7 bankruptcy petition, all of your possessions, including investments, are considered to be part of your bankruptcy estate. Unless you are able to apply an exemption to the property, thereby excluding it from your bankruptcy estate, the funds in a mutual fund are subject to forfeiture to your creditors.

Inherited IRA Beneficiary Management Guide

When someone dies with money still in an IRA, the money passes to the named beneficiary of the account. The Internal Revenue Service has strict rules regarding distributions to beneficiaries. Knowing your options for how to treat your inherited IRA will help with tax planning and avoiding unnecessary penalties.

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