Creditors cannot access savings held in a 401k, 403(b), IRAs, Keoghs, profit sharing plans or money purchase plans. However, the IRS can access these funds for a federal tax levy. Also, assets in these plans can be given to an ex-spouse to satisfy a domestic relations order.
In a traditional IRA or Roth IRA up to $1,362,800 of funds are protected from a bankruptcy estate. This amount adjusts every three years to account for the cost of living increases. The most recent adjustment occurred on April 1, 2019. The limit will adjust again in 2022. (11 U.S.C. § 522(n).)
Withdrawn Retirement Benefits Aren’t Exempt
Although the funds in your retirement accounts are exempt from creditors (subject to the limitations discussed above), retirement benefits paid to you as income aren’t exempt.
Here’s how this works:
- Chapter 7 bankruptcy. If you receive a monthly payment from a pension or retirement account, the court will consider it income that gets figured into your Chapter 7 means test qualification. In a Chapter 7 bankruptcy, the bankruptcy court cannot take any retirement benefits that are necessary for your support, but it could take amounts over and above what you need for your support and use it to repay your creditors.
- Chapter 13 bankruptcy. In this chapter, retirement income will help determine what portion of your unsecured debts you must repay in your Chapter 13 repayment plan.
Finding out what will happen to your retirement funds in bankruptcy is important. In fact, many people who are at the stage of life that they’re withdrawing retirement funds are judgment proof and don’t need to file for bankruptcy. It’s prudent to protect your interests by meeting with a qualified bankruptcy lawyer.