Because retirement accounts are protected by exemptions, most people who file bankruptcy keep all their existing retirement savings. Many types of retirement accounts have an unlimited exemption amount, but some — like IRAs — are limited. Social Security benefits are also exempt, but the funds can't be commingled. You must keep them in a separate account.
Written by Attorney Paige Hooper.
Updated June 17, 2022
When you’re considering bankruptcy, it’s important to understand all the ways that filing bankruptcy can affect your finances. This includes your retirement and whether you’ll be able to keep the money you’ve already saved for retirement. Existing retirement savings are usually protected from bankruptcy, but there are some limits and exceptions. Depending on which kind of bankruptcy you file and your employer’s policies, bankruptcy can also affect your ability to contribute additional funds to your retirement plan — at least while the bankruptcy is ongoing.
This article explains the protections available for existing retirement savings and the limits on those protections. It also discusses how bankruptcy can temporarily affect your ongoing retirement contributions.
How Bankruptcy Affects Existing Retirement Savings
When you file bankruptcy, you also form a bankruptcy estate. Your bankruptcy estate is made up of all the assets you own at the time of filing. Exemption laws protect some or all the property in your estate. When you claim an asset as exempt, the trustee can’t take it or sell it to pay your creditors.
Each state has a set of exemption laws. There are also federal bankruptcy exemptions and federal non-bankruptcy exemptions. Some states require residents to use the state exemptions, while other states allow filers to choose between state or federal exemptions. Retirement savings are an exception to this rule, though.
Anyone can use the federal retirement exemptions, even if your state doesn’t allow other federal exemptions.
Some states also have specific exemptions for retirement funds.
To qualify for federal protection, your retirement savings must be part of a recognized retirement plan, such as a 401(k), IRA, or pension plan. Money in an ordinary savings account doesn’t qualify for retirement savings exemptions, even if you plan to use that money to retire. There may be other requirements or limits depending on which type of retirement account you have.
ERISA-Qualified Retirement Accounts
Federal bankruptcy exemptions provide unlimited protection for any retirement plan that’s qualified under the federal Employee Retirement Income Security Act (ERISA). To qualify, a plan must be established by an employer, be tax-exempt, and meet other requirements imposed by the IRS.
Some common types of ERISA-qualified plans include:
Section 401 plans, such as a 401(k)
Section 403 profit-sharing plans, such as a 403(b)
Deferred compensation plans, such as a 457(b)
Defined-benefit plans, such as a Section 408 pension
Most governmental plans
Most plans run by tax-exempt organizations
You can determine if your account is ERISA-qualified by checking your plan paperwork. Even if your plan doesn’t fall under ERISA, it’s likely still protected in bankruptcy. Keep in mind, though, that exemptions for non-ERISA plans usually don’t cover an unlimited amount.
Individual Retirement Accounts (IRA)
IRAs are similar to 401(k) plans, but they’re set up and maintained by an individual (you) instead of by your employer. IRAs aren’t required to comply with ERISA rules, so they aren’t covered by the same unlimited federal bankruptcy exemption as ERISA-qualified plans. There are exceptions, though. Some Simple IRAs qualify for ERISA protections. Also, if you roll an ERISA-qualified account, like a 401(k), into an IRA, the account might still qualify for the ERISA exemption.
But there are still generous exemptions available to protect IRAs. Federal bankruptcy exemptions protect up to $1,512,350 of your IRA savings. This amount is adjusted every three years. The last adjustment was on April 1, 2022. If you have more than one IRA, the dollar limit applies to the total of all IRAs, not to each account. If you’re married and filing bankruptcy jointly with your spouse, you can each claim the full exemption amount. The exemption is the same for traditional IRAs, Roth IRAs, and other IRA types.
Plans Protected By Federal Non-Bankruptcy Exemptions
In addition to the federal bankruptcy exemptions, there are also federal non-bankruptcy exemption laws. These laws provide unlimited protection for retirement benefits for certain groups of people, including:
Civil service employees
Military service employees
Military Medal of Honor recipients
Foreign service employees
Federal non-bankruptcy exemptions also protect most Social Security and veterans benefits. You can’t use both the federal bankruptcy exemptions and the federal non-bankruptcy exemptions. But if you use state bankruptcy exemptions, you can use the federal non-bankruptcy exemptions.
Social Security Benefits
Many Americans rely on Social Security income in retirement rather than a retirement savings account. Social Security benefits are fully protected by federal non-bankruptcy exemptions, but to qualify for the exemption, you must treat your Social Security income like a retirement savings account. In other words, you must keep your Social Security benefits in an account that is separate from the rest of your money. If you put this income into a bank account where it’s mixed with income from other sources, you likely won’t be able to claim the exemption.
Withdrawn Retirement Benefits
Funds in a retirement savings account are usually exempt in bankruptcy. But if you withdraw those funds they lose their exempt status. For example, if you withdraw funds and deposit them into your general checking account, they’re no longer exempt. This is true even if you deposit the funds into a separate account.
This rule is different from the rule for Social Security retirement benefits. Social Security income stays exempt as long as you keep it in a separate account. That’s because with a retirement savings account, you can choose whether and when to withdraw funds. Social Security recipients don’t have this option: Social Security payments are automatically withdrawn from the government’s account each month.
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How Bankruptcy Affects Ongoing Retirement Contributions
Whether you can contribute money to your retirement account while your bankruptcy case is active depends on which type of bankruptcy you file and whether the contributions are mandatory or voluntary.
Some employers require employees to contribute to their retirement plan each pay period. This is most common with public- and government-based pension and retirement systems. You can deduct mandatory retirement contributions from your income on the Chapter 7 means test (or its Chapter 13 equivalent). You can also continue to make mandatory retirement contributions throughout your bankruptcy in both Chapter 7 and Chapter 13 cases.
Retirement contributions you can control or opt out of are considered voluntary contributions. You can’t deduct voluntary contributions from your income when completing the Chapter 7 means test. Bankruptcy courts are divided as to whether you can include voluntary contributions when completing Form 122C-2 in a Chapter 13 case.
In Chapter 7 bankruptcy, you usually don’t have to stop these contributions while your bankruptcy is ongoing. That’s because Chapter 7 cases usually only last a few months from start to finish, and the contributions you make during this time aren’t likely to affect the outcome of your bankruptcy case.
A Chapter 13 bankruptcy, on the other hand, lasts from three to five years. During that time, you’re required to use all your available income to pay your debt through your Chapter 13 repayment plan. Not all bankruptcy courts allow a Chapter 13 debtor to make voluntary retirement contributions throughout their bankruptcy. Your Chapter 13 bankruptcy trustee can tell you about the rule in your jurisdiction.
Most people who file bankruptcy can keep all their existing retirement savings. Retirement accounts are protected under exemption laws. Many types of retirement accounts qualify for unlimited exemptions. Others, such as IRAs, are subject to limits (if your IRA balance exceeds these limits, though, you still get to keep around $1.5 million). Social Security benefits are also exempt, but only if you keep them in a separate account.
You can continue to make mandatory contributions to your retirement savings while your bankruptcy is active. The rules regarding voluntary contributions are less clear. In a Chapter 13 bankruptcy, you may have to stop voluntary contributions while your case is ongoing.