What are Bankruptcy Exemptions for IRAs?
Bankruptcy exemptions for IRAs are legal safeguards designed to protect your retirement assets if you declare bankruptcy. These exemptions work by excluding your IRA assets from your bankruptcy estate, meaning these assets cannot be used to pay off your debts.
The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005 established federal protection for retirement accounts in bankruptcy. Traditional and Roth IRAs are protected up to a specified amount, which is periodically adjusted for inflation. As of my knowledge cutoff in September 2021, the exemption limit was approximately $1.3 million, but this number could have changed. You would need to check the current figures.
It’s important to note that this cap does not apply to amounts rolled over from other retirement plans, such as 401(k)s or similar employer-sponsored plans. These rollover amounts are fully protected.
How Do Bankruptcy Exemptions for IRAs Work?
If you declare bankruptcy, most of your assets form part of your bankruptcy estate and can be used to repay your debts. However, assets protected by bankruptcy exemptions, including your IRA, are excluded from this.
For IRA owners, this means that their retirement savings are safe from creditors, up to the federal limit. If the value of your IRA exceeds the limit, the excess may be vulnerable, depending on your state’s laws.
Who Can Benefit from These Exemptions?
Any individual who owns an IRA and is going through bankruptcy can potentially benefit from these exemptions. Whether you have a Traditional or Roth IRA, you can shield your retirement savings from creditors, up to the federal limit.