ComplianceTax & AccountingSeptember 01, 2020

Individual retirement accounts and bankruptcy - exemption amount


The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 provides protection for certain individual retirement account (IRA) assets under federal law. The law provides for the exclusion from a bankruptcy estate of up to $1 million of IRA assets attributable to regular contributions. The $1 million amount is subject to cost of living adjustment every three years. The most recent adjustment was April 1, 2019, which raised the exemption to $1,362,800. This amount could be increased if the interests of justice so require. In other words, a bankruptcy judge or court could decide to exempt a larger amount.

Excluded Assets

IRA assets attributable to rollover contributions from qualified employer plans, employer simplified employee pension (SEP) plan contributions, and employer Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) IRA plan contributions are excluded when determining the adjusted $1 million limit.

Inherited IRA Assets

The U. S. Supreme Court ruled in 2014 that inherited IRA assets of nonspouse beneficiaries are not protected in a bankruptcy proceeding. It is unknown at this time whether assets inherited by a spouse beneficiary are protected.

Seek Professional Guidance

Filing for bankruptcy and understanding the laws requires counsel. IRA owners and IRA custodians/trustees should seek professional tax or legal guidance for any bankruptcy-related issues concerning IRAs.

For an opportunity to learn more about IRAs and other tax-advantaged accounts including Health Savings Accounts and Coverdell Education Savings Accounts, consider our on-demand video training offered on a variety of topics. Go here to learn more about training opportunities available to you, or you can call us at 1-800-552-9408.
Senior Specialized Consultant, Tax Advantaged Accounts
With more than 36 years of experience, Steve has worked closely with hundreds of financial organizations to help them create, implement, and maintain their tax-advantaged accounts program. Steve also has an extensive background in working with employer qualified plans.