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Asset Protection and Individual Retirement Accounts Part I: IRAs and Bankruptcy – Statutory Protections

by Douglas Lineberry on January 13, 2010

Debtors have the right to claim certain property as exempt and therefore not available to be used in satisfaction of debts in the bankruptcy proceeding.  Debtors generally have the choice of exemptions set forth in federal statutes (section 522 of the bankruptcy code) or under state law.  For example, you can review the list of federal and Washington state exemptions here.

Generally, almost all “retirement funds” are exempt assets in bankruptcy.  This is very broad protection that applies to all types of plans including 401(k) plans and 403(b) plans.  IRAs and Roth IRAs are regarded as retirement funds, but there is an exception to the exemption.  They are only exempt in the maximum amount of $1,000,000.  To add another twist, there is as exception to the exception, which is that amounts in an IRA or Roth IRA that were originally in another type of retirement account (like a 401(k) plan) and transferred to an IRA in a rollover are not subject to the $1,000,000 cap.  This creates an interesting problem if an IRA account is over $1,000,000 and contains both contributory and non-contributory amounts.

Planning Tip!  Keep rollover IRAs and Roth IRAs separate from contributory IRAs and Roth IRAs to ensure the $1,000,000 cap does not apply to the rollovers!

In the next post in this series we’ll discuss prohibited transactions and how they can expose your IRA to claims of creditors, both in and out of bankruptcy.

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