Bankruptcy | IRA and Qualified Plan Rules | Lord Abbett

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Bankruptcy

Should an investor face insolvency, he or she can look to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) for guidance on retirement assets that are shielded from federal bankruptcy. Effective for bankruptcies filed on or after October 17, 2005, retirement accounts are protected in the event of individual bankruptcy, whether the Employee Retirement Income Security Act (ERISA) is applicable. This protection is also extended to IRAs. 

Under BAPCPA, assets held in qualified plans such as a 401(k), Profit Sharing or Defined Benefit plans are generally protected from an individual's bankruptcy estate. Additionally, under ERISA, plan assets must not be available to the creditors (inside or outside of bankruptcy) of the employee, beneficiary, or employer. Notably, a qualified retirement plan does not merit ERISA (federal) creditor protection unless at least one non-owner employee benefits. Retirement plans that only benefit an owner and/or the owner's spouse do not constitute ERISA based plans and may be reachable by creditors outside of bankruptcy. Consequently, state laws will continue to play a role. 

Bankruptcy discussion is based on federal law at the time of this writing and is subject to change. It is not intended to be tax or legal advice. Anyone contemplating filing bankruptcy should review this serious matter with their tax or legal adviser before proceeding.

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