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Retirement Accounts and Bankruptcy: What Will Happen to Your 401(k) or IRA?

Many people who come to us for advice about filing for bankruptcy or Debtors Court want to know what will happen to their retirement accounts when they file. They have worked hard to save as much as possible, and they do not want to give up their savings. 

Fortunately, retirement accounts are not at risk in the vast majority of Chapter 7 and Chapter 13 (Debtors Court) cases. While there are exceptions for certain types of accounts, these exceptions do not apply to most people. 

Most Types of Retirement Accounts are Protected in  Bankruptcy and Debtors Court 

Most types of retirement accounts are protected in bankruptcy and Debtors Court. To understand why, it is important to remember the purpose of the bankruptcy process. Bankruptcy and Debtors Court provide you with a fresh start when you have gotten in over your head  financially. If you had to give up your retirement savings when you filed, that would not serve the intended purpose of bankruptcy and Debtors Court. 

Examples of retirement accounts that are fully exempt from both Chapter 7 and Chapter 13  (Debtors Court) cases include: 

  • 401(k), 403(b), and 457 accounts 
  • Defined benefit plans 
  • Keogh plans 
  • Deferred compensation plans of State and local governments and tax-exempt  organizations 
  • Qualified pension, profit-sharing, and stock bonus plans 
  • Teachers’ Retirement 
  • State Employees Retirement Systems accounts 
  • Railroad retirement benefits 
  • VA pension benefits 
  • Social Security benefits 

If you have any of these retirement assets, they will be protected in your Chapter 7 or Chapter  13 (Debtors Court) case. You can file regardless of how much retirement savings you have, and

you can keep your retirement savings regardless of which type of bankruptcy you choose to file. Keep in mind that nondischargeable debts can affect some retirement accounts. You can read more about nondischargeable debts here.  

What About IRAs and Roth IRAs? 

If you have an IRA or Roth IRA, you may have noticed that your retirement account is not included in the list above. But do not worry. There is still a very good chance that none of your retirement savings will be at risk if you file for bankruptcy or Debtor Court. 

Under the United States Bankruptcy Code, IRAs and Roth IRAs are exempt up to $1,512,350  until 2025 (when this exemption amount will likely increase). This means that if your IRA or Roth IRA is worth less than this amount, then your entire retirement savings will be exempt from your bankruptcy or Debtors Court case. If you have more than $1,512,350 saved, then only the portion in excess of this amount will potentially be at risk when you file. 

Withdrawals from and Contributions to your Retirement  Account 

It is generally not a good idea to withdraw or take a distribution from your retirement account for at least two reasons. First, a distribution would be considered extra income and could mean that you no longer qualify for a Chapter 7 bankruptcy case. Second, the withdrawn funds are no longer exempt; therefore, the bankruptcy trustee might try to take some or all of the withdrawn funds.  

Also, keep in mind that any contribution above and beyond an ordinary contribution might draw the attention of the bankruptcy trustee. For example, if a debtor transfers a large sum of money into a retirement account on the eve of their bankruptcy case, such transfer could be deemed avoidable.  

Discuss Your Options with an Alabama Bankruptcy Attorney for Free 

If you would like to know more about Chapter 7 and Chapter 13 (Debtors Court) exemptions, or if you have any other questions about filing for bankruptcy or Debtors Court in Alabama, we invite you to contact us. In order to arrange a free, no-obligation consultation with Alabama bankruptcy attorney Greg Biddle, please call 205-328-3328 or tell us how we can reach you  online today.

Contact us today.


We offer FREE advice by phone and FREE appointments and consultations.