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Retirement Accounts: Are They Protected in Bankruptcy?

Faced with overwhelming medical debt, many will seek a bankruptcy filing to try to get their financial life back in order again. That said, many who are facing the prospect of bankruptcy for the first time have a lot of questions. Chief among those questions is what will happen to their investment accounts if they move forward with their bankruptcy filing.

401(k) Plans are Usually Safe

Your thoughts may naturally drift to your 401(k) plan when you think about the assets that creditors may come after when you declare bankruptcy. This account, which you have likely worked very hard to build up, is usually protected from bankruptcy liquidation. The employee retirement income security act (ERISA) of 1974 has a provision within it that exempts 401(k) plans from being liquidated in bankruptcy if those plans are employer-sponsored (the vast majority are).

A big exception to the ERISA protection that you may enjoy in some cases is the IRS. They will not have to hold back from coming after your 401(k) funds if you owe backed taxes to the government. They can come after those funds in an attempt to clear up the debts that you owe to them. However, even the IRS is hesitant to do this unless they feel that it is their last resort to recover some of the funds that you rightfully owe to the government.

Traditional and Roth IRAs

Another common retirement account type is traditional and Roth IRAs. Many account holders will qualify to have their accounts protected from bankruptcy liquidation. The exception to this rule is if the account holder has more than $1.3 million in assets in their retirement accounts. This is the cap that is protected at this time, though the amount is adjusted for inflation once every 3 years. The amount above the cap may be liquidated to try to pay off debts owed.

Self-Employed Plans

Anyone who is self-employed or runs their own business can take comfort in the fact that their plans are protected from bankruptcy liquidation in almost all cases. The Motley Fool explains:

Good news for small business owners: Unlike traditional and Roth IRAs, self-employed plans (SEP) and SIMPLE IRAs aren't included in the aggregate IRA limitation, which means that bankruptcy trustees can't touch them no matter how much money you've saved.

At least those who have set up self-employed plans can rest assured that the funds that they have built up in these plans is protected from the long arm of the law when it comes to bankruptcy proceedings.


There are not nearly as many people blessed to have a pension available to them as there used to be, but there are still some who have to think about this when they are trying to figure out what they can do as they work through a bankruptcy proceeding.

Two considerations come into play when determining if pensions are fair game for creditors in a bankruptcy proceeding or not. Those considerations are:

  • Is the pension exempt from bankruptcy discharge in the tax code?
  • Is the pension protected under the ERISA rules?

Both of these questions must be carefully considered before anyone assumes anything about their particular plan. Assuming that your pension will automatically be protected is a dangerous thing to assume, but there are circumstances when it might. This is a detail that you can and should review with your attorney.

No matter what kind of retirement accounts you may have available that you would like to protect, we want to hear from you. Please reach out and contact us for additional information about how to protect as many of your retirement accounts as possible in bankruptcy.