ComplianceTax & AccountingJune 10, 2016

Individual Retirement Accounts and bankruptcy – exempt amount increased

Overview

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, 2016, which raised the exemption to $1,283,025. 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 $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 is not an easy or simple process. IRA owners and IRA custodians/trustees should seek professional tax or legal guidance for any bankruptcy-related issues concerning IRAs.