Bankruptcy Protection for Retirement Plans and IRAs


 In general, IRAs are protected from bankruptcy, thanks to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCA). As a result of this legislation, IRA investors facing bankruptcy can shield their IRA assets from creditors. While retirement plans that meet the requirements of the Employee Retirement Income Security Act of 1974 (ERISA) — such as employer-sponsored plans like 401(k)s and 403(b)s — have long been excluded from an individual's bankruptcy estate, BAPCA extended these bankruptcy protections to IRAs and certain other investment products.

BAPCA gives IRA investors a degree of protection against creditors that didn't exist before, including additional protections to investors who frequently change jobs and may want to consolidate their multiple retirement plans into IRAs.

What BAPCA protections mean for IRA owners facing bankruptcy

Here's a quick overview of how BAPCA affects IRA owners facing bankruptcy. Note: bankruptcy laws can and do change. Always consult a qualified attorney for specific advice regarding your situation.

  • BAPCA only applies to bankruptcies. These protections do not shield an investor's IRA assets from other types of judgments, such as civil lawsuits. Qualified retirement plans, however, because of ERISA, are protected from both bankruptcies and other types of judgments. Note: inherited IRAs may not be protected.
  • Contributory and Roth IRA assets are capped at an inflation-adjusted amount of $1 million. BAPCA offers protection for all contributory and Roth IRA assets up to a $1 million limit. This $1 million cap should provide ample protection for most IRA investors, because it's unlikely that many investors have accumulated over $1 million in their IRAs. (Note that IRAs were only introduced in 1974 and, until 2002, the maximum annual contribution was just $2,000.)
  • Rollover IRAs are exempt from bankruptcy beyond the $1 million limit. According to BAPCA, qualified retirement plan assets that are rolled over to an IRA are completely exempt from bankruptcy proceedings, even if the amounts exceed the $1 million limit that's in place for contributory or Roth IRA assets. This aspect of BAPCA can make rolling over qualified retirement plan assets to an IRA a good strategy. However, the owner of the Rollover IRA should establish a separate IRA if they want to make on-going contributions. Only funds in an IRA that can be traced back to a qualified plan are exempt from the $1 million cap.
  • BAPCA also covers SEP and SIMPLE IRAs. Assets within Simplified Employee Plan (SEP) and Savings Incentive Match Plan for Employees (SIMPLE) IRAs are excluded from bankruptcy proceedings — and they're shielded for unlimited amounts. Additionally, BAPCA provides bankruptcy protection for Keogh plans and independent (or "solo") 401(k) plans, which are typically set up by someone operating a sole proprietorship. Because ERISA protections do not extend to either Keogh or independent 401(k) plans, the bankruptcy protections offered by BAPCA provide safeguards for investors that didn’t exist previously.
  • BAPCA covers certain education savings vehicles. These include Coverdell Education Savings Accounts and state-sponsored Section 529 college savings programs. Specifically, BAPCA protects any contributions made to these products for a child, grandchild, stepchild or step-grandchild more than two years before the filing of the bankruptcy petition. However, money contributed to these products for a child, grandchild, stepchild or step-grandchild made more than 365 days but less than 720 days before the bankruptcy filing are protected only up to $5,000 per beneficiary.
  • State laws come into play. Some states already have laws that shield residents' IRAs from creditors. However, other states don't have any protections in place, or safeguard IRAs from bankruptcy proceedings only up to a limit of $100,000. In these cases, BAPCA increases this protection up to the $1 million limit.

Next steps

Taking into account the many factors involved in bankruptcy proceedings, if you have assets in IRAs or other products potentially affected by BAPCA, consult your tax and legal advisors for the appropriate strategies for maximizing protection of your assets. TIAA-CREF and its affiliates do not provide tax or legal advice.

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