Bankruptcy and Retirement

  • Bankruptcy

[The following article is written by Andy Raybuck. Andy is an accomplished financial writer and online community expert. Several of his write-ups are published on well-known financial websites. He shares his experience through well-researched articles on money management and a host of personal financial planning issues.]

Can you protect retirement accounts when filing bankruptcy?

You must have heard the term ‘exempt’ and ‘non exempt’ in bankruptcy. If you haven’t, then let me tell you that non-exempt properties are those which can be liquidated to pay off your debts. This includes, second car, mutual funds, paintings, etc. On the other hand, exempt assets are those which debtors can keep with them in order to survive. This includes, Social Security benefits, child and spousal support, clothes, furniture, minimum income and retirement savings accounts.

Retirement accounts that are exempt in bankruptcy 

Usually, you don’t have to worry about your pension at the time of filing bankruptcy. The bankruptcy laws offer lots of protections to retirement plans. Your bankruptcy plan administrator can give you detailed information about it.

As per the current bankruptcy laws, some retirement accounts are straightway excluded from the bankruptcy estate. This basically implies that you can retain those retirement accounts. The bankruptcy trustee doesn’t even supervise these accounts. As such you don’t even need to claim these accounts as exempt. However, you’re still required to include them in your bankruptcy schedules to avoid unnecessary troubles in future.

Here is a list of retirement accounts that are not part of the bankruptcy estate.

  • Tax deferred annuity plans. This comes under IRC 403 (b) section.
  • Deferred compensation plans that comes under IRC 567 section.
  • Government retirement plans. This basically comes under IRC 414(d) section.
  • Educational Individual Retirement Accounts (IRA). This comes under the IRC 530(1)(b) section.
  • Pension and retirement plans.

You can keep the retirement accounts that are exempt in bankruptcy. At the time of filing bankruptcy, have a discussion with the bankruptcy trustee and decide if you want to claim state or federal exemptions.

State exemptions

Some states offer specific exemptions for retirement plans and pensions. This involves exclusive  protections for state employee retirement plans. However, the level of protection will not be same in all the states. If you want to claim for state exemptions, make sure you dig out the relevant details from the Internet. If you understand the laws (it is quite possible since everyone can’t understand all the legal jargons), then ask your bankruptcy attorney.

Here is a list of retirement accounts that come under the state exemptions:

  • Individual Retirement Accounts (IRA)
  • Qualified annuity plans
  • Eligible deferred compensation plans
  • Roth IRAs
  • Eligible deferred compensation plans

Some states offer complete protection to bankruptcy filers. There are no restrictions. For instance, Connecticut, New York and New Jersey. On there other hand, some state laws specify the amount that can be protected (individual retirement savings account) under bankruptcy. For example, Nevada.

Federal exemptions

Federal exemptions are vast. In fact, it is more expansive than the state exemptions. Apart from the above mentioned plans (see the section under state exemptions), you can claim an exemption when:

(a) You receive payments under annuity, pension, stocks, profit sharing due to age, sickness, disability, or to support your dependents.

Two Tips you need to follow to safeguard your retirement plans

Check out the 2 tips you need to follow to protect your retirement when considering bankruptcy seriously.

  1. Empower yourself with right knowledge: Go through the Employee Retirement Income Securities Act (ERISA) minutely. This Act helps you safeguard your employer sponsored retirement accounts from hungry creditors when you file bankruptcy. However, your ex-spouse and the IRS still have the right to go after these accounts during bankruptcy.
  2. Approach an attorney soon: Consult a bankruptcy attorney if you haven’t done yet. This is because an experienced attorney can help you protect your retirement accounts during bankruptcy.

Reasons why retirement savings accounts are exempt

Government always encourages people to save for their retirement years. This is because in the modern society, lots of children don’t want to take the financial responsibility of elder parents. Besides, everyone needs to save for the retirement years. Otherwise, people will be heavily depended upon the Social Security benefits and Medicare.

Usually, accounts exempt from the whiplash of income taxes are also exempted in bankruptcy. This includes, 401(k)s, IRAs, 403(b)s, Roth IRAs, etc.


Don’t withdraw money from your retirement account at the time of filing bankruptcy. As you now know, retirement plans are protected under bankruptcy. Creditors may access your retirement savings accounts when they’re being used. Creditors will regard them as your income and try to utilize them to get back their money.

Remember, it is not advisable to liquidate retirement savings accounts for another reason also. The IRS will impose tax and penalties. This will increase your expenses and the IRS won’t let you breathe easy till you pay the tax and penalties. Keep it in mind that the IRS has powerful collection powers. They’re not normal creditors who can be easily satisfied. So, when you’re taking out money from your retirement savings accounts, you’re basically inviting even more powerful creditor in your life.


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