Rules for Retirement Accounts in Bankruptcy | Lord Abbett
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Retirement Perspectives

If a person files for bankruptcy, it’s important to know the degrees of protection for 401(k) and individual retirement accounts (IRAs).

The COVID-19 virus is not only threatening our health, it’s also damaging businesses around the world. Companies large and small are doing everything to keep their doors open, including cutting workers’ hours or reducing headcount through a combination of furloughs and layoffs. With reduced income, workers may have little choice but to file for bankruptcy protection. Thus raising an important question: Are retirement accounts protected if a taxpayer declares bankruptcy?

The good news is yes, but the rules for protection typically depend on the type of retirement account owned and state law. Yep, it’s complicated. Individuals facing severe financial distress under federal bankruptcy laws can look to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA); the Act not only provides clarification but actually extends bankruptcy protection for the debtor’s retirement funds. In other words, when a bankruptcy court determines what debts a person will have to repay and whether to wipe out any or all outstanding liabilities, generally the court won't factor in any exempt retirement assets in its analysis. Those protections can help preserve hard-earned retirement savings after experiencing a financial downturn.

Under the Employee Retirement Income Security Act (ERISA) Title I, participant accounts in qualified retirement plans are protected from garnishment, levy, or attachment by creditors. Therefore, under BAPCPA, assets held in qualified retirement plans (i.e. 401(k), 403(b) plans, and governmental 457(b) plans subject to Title I ERISA are entirely protected from an individual’s bankruptcy estate.

BAPCPA also provides protection for IRAs, though it varies by IRA type. Furthermore, BAPCPA excludes traditional IRAs and Roth IRAs from a bankruptcy estate, but only up to $1,000,000. This limit is inflation adjusted every three years. In the current three-year period, which ends on April 1, 2022, both traditional and Roth IRAs are protected to a total dollar value of $1,362,800. Exceeding the aforementioned limit will impact few IRA owners. Since the cap applies only to traditional or Roth IRA contributions and earnings, the bankruptcy law protects nearly all funds held in IRAs. Why? It’s highly improbable that anyone has accumulated an amount greater than $1,362,800 limit in an IRA with simply contributions (current max $6,000 plus $1,000 catch up for those individuals age 50 and older) and earnings.

Owner-Only Retirement Plans
Owner-only 401(k) plans are protected in bankruptcy. BAPCPA draws no distinction between owner-only retirement 401(k) plans and other qualified retirement plans with respect to bankruptcy exemption. Outside bankruptcy, however, it appears that owner-only plans may be subject to attachment by creditors.

Department of Labor (DOL) regulations say that a person who owns a business is not considered an employee for retirement plan purposes. Furtheremore the regulations go on to say that a plan that covers only partners or only a sole proprietor is not covered under Title I of ERISA. However, a plan under which one or more common law employees (in addition to the owners) are participants is covered under Title I, and ERISA protections apply to all participants (not just the common law employees). Thus, inclusion of one or more non-owner employees changes a non-ERISA retirement plan into an ERISA-qualified plan and thereby protects plan assets from the claims of creditors.

Rollover IRAs
Are IRAs that were funded via rollover from a previous employer’s retirement plan (i.e. 401(k), 403(b), etc.) protected in bankruptcy? Yes. All rollover IRAs are protected and don’t count to the aforementioned limit that applies to contributory IRAs. Under BAPCPA, funds that are rolled over to an IRA from a qualified retirement plan are entirely excluded from the bankruptcy.

Tip! Due to greater and more favorable asset protection (no asset limit), investors should consider establishing and maintaining separate IRAs to distinguish contributory (traditional/Roth IRA) and rollover IRA accounts. Notably, establishing multiple accounts will involve additional paperwork and potential costs.

ERISA defines a “pension” plan as any “plan, fund, or program that is established or maintained by an employer… that provides retirement income to employees.” Although contributions under both SEP and SIMPLE IRAs are immediately allocated among individually owned IRAs of the participating employees, it appears that funds held in SEP and SIMPLE IRAs are ERISA pension plans due to employer involvement—and therefore protected.

Inherited IRAs
Are inherited IRA funds protected in bankruptcy?


The Supreme Court ruled unanimously that BAPCPA protection is available only for "retirement savings," and that IRA funds are retirement savings only for their original ownersnot for heirs who can withdraw and spend them at any age (Clark v. Rameker).


Inherited IRAs, unfortunately, aren’t offered the same protection as either contributory or rollover IRAs. In Clark v Rameker, the Supreme Court held that funds in an inherited IRA are not exempt from the bankruptcy estate. Therefore, inherited IRA funds are not protected in bankruptcy under federal law.

However, states can offer bankruptcy protection—or, for that matter, creditor protection in non-bankruptcy situations—to inherited IRAs under state law.

Creditor protection
What protection is available outside of bankruptcy? While filing for bankruptcy can help resolve some creditor issues, not all creditor issues warrant or result in filing for bankruptcy. That said, creditor protection rules differ between retirement accounts held within qualified plans (401(k)) subject to Title I of ERISA and IRAs.

Surprisingly; general credit protection for IRAs does not apply at the federal level. Instead, general creditor protections for traditional and/or Roth IRAs are based on state law—and can vary from state to state. Therefore, IRA funds could be seized by creditors. You will have to determine what protection your state provides for IRAs outside of bankruptcy. We suggest contacting an experienced tax professional to determine what level, if any, creditor protection your state of residence offers.

Employer-sponsored retirement plans subject to Title I of ERISA, on the other hand, have very strong creditor protection provided at the federal level under ERISA. ERISA covered retirement plan funds are fully protected from creditors with an exception for qualified domestic relation orders (QDROs) and IRS levies On the other hand non-ERISA retirement plans (i.e. certain 403(b) and 457(b plans) receive protection based on state creditor law. Finally, SEP and SIMPLE IRAs generally adhere to the same non-ERISA plan creditor rules and therefore only receive the level of protection per state law.

Tip! A 403(b) account can be classified as either: ERISA or non-ERISA plan. The determination is dependent on a number of factors including: plan sponsor (i.e., non-profit, public school, etc.) and employer funded contributions, if any.

What happens if funds in an ERISA plan are “rolled over” to an IRA? Unfortunately, ERISA creditor protection is lost. Instead, protection, if any, afforded to IRAs under state law will apply. Therefore, participants in qualified retirement plans (i.e. 401(k)) that are subject to ERISA should consider the degree of creditor protection when deciding whether to leave their accounts in their qualified retirement plan or roll over to an IRA. Notably a rollover Ira is exempt from the bankruptcy estate bankruptcy.


When it comes to rollover IRAs, leaving funds in a qualified employer plan will give the most protection from creditors.


Lastly, creditor protection for Roth IRAs (if any) could be different than for traditional IRAs based on the state you live in. We suggest consulting with a tax professional or an attorney to determine what protection your state offers IRAs prior to rolling funds from your employer’s ERISA covered retirement plan.

IRS Levy

Can the IRS take your IRA? It may come as a surprise, but the answer is yes. If you are in debt to the IRS, the agency can levy, or seize, your IRA. Funds held in a qualified retirement plan are also subject to an IRS levy. Furthermore, if your IRA is levied, the amount levied will be subject income tax. Notably, there is an exception to the 10% early distribution penalty for distributions due to IRS levies for those under age 59½.

If you have additional questions, please contact your Lord Abbett representative at 888-522-2388.


To comply with Treasury Department regulations, we inform you that, unless otherwise expressly indicated, any tax information contained herein is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties that may be imposed under the Internal Revenue Code or any other applicable tax law, or (ii) promoting, marketing, or recommending to another party any transaction, arrangement, or other matter.

The information is being provided for general educational purposes only and is not intended to provide legal or tax advice. You should consult your own legal or tax advisor for guidance on regulatory compliance matters. Any examples provided are for informational purposes only and are not intended to be reflective of actual results and are not indicative of any particular client situation.

The information provided is not directed at any investor or category of investors and is provided solely as general information about Lord Abbett's products and services and to otherwise provide general investment education. None of the information provided should be regarded as a suggestion to engage in or refrain from any investment-related course of action as neither Lord Abbett nor its affiliates are undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity. If you are an individual retirement investor, contact your financial advisor or other fiduciary about whether any given investment idea, strategy, product or service may be appropriate for your circumstances.


Traditional IRA contributions plus earnings, interest, dividends, and capital gains may compound tax-deferred until you withdraw them as retirement income. Amounts withdrawn from traditional IRA plans are generally included as taxable income in the year received and may be subject to 10% federal tax penalties if withdrawn prior to age 59½, unless an exception applies.

A Roth IRA is a tax-deferred and potentially tax-free savings plan available to all working individuals and their spouses who meet the IRS income requirements. Distributions, including accumulated earnings, may be made tax-free if the account has been held at least five years and the individual is at least 59½, or if any of the IRS exceptions apply. Contributions to a Roth IRA are not tax deductible, but withdrawals during retirement are generally tax-free.

A SIMPLE IRA plan is an IRA-based plan that gives small-business employers a simplified method to make contributions toward their employees’ retirement and their own retirement. Under a SIMPLE IRA plan, employees may choose to make salary reduction contributions and the employer makes matching or nonelective contributions. All contributions are made directly to an individual retirement account (IRA) set up for each employee (a SIMPLE IRA). SIMPLE IRA plans are maintained on a calendar-year basis.

A simplified employee pension plan (SEP IRA) is a retirement plan specifically designed for self-employed people and small-business owners. When establishing a SEP IRA plan for your business, you and any eligible employees establish your own separate SEP IRA; employer contributions are then made into each eligible employee’s SEP IRA.

An IRS levy permits the legal seizure of your property to satisfy a tax debt. It can garnish wages, take money in your bank or other financial account, seize and sell your vehicle(s), real estate and other personal property.


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