COVID has impacted us all and unfortunately forced many individuals to be laid off or business owners to close their doors. As relief runs out and with no further relief in sight it is expected that bankruptcy filings will increase in 2021. The good news is that there is protection for people’s retirement accounts, but the coverage varies depending on state law and the type of retirement account. This coverage means in the event of bankruptcy your retirement accounts are protected and can’t be touched by creditors.
Bankruptcy
401(k), 403(b), and 457 plans
Plans under Employment Retirement Income Security Act (ERISA) are protected from garnishment or levy from creditors. Retirement accounts under this protection include most 401(k), 403(b), and government 457 plans. Some types of 403(b) plans provided by government or churches may be exempt from ERISA.
Traditional IRA and Roth IRA accounts
Under the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) creditor protection is provided for Traditional and Roth IRAs. The BAPCPA provides protection in the case of bankruptcy up to $1 million indexed for inflation ($1, 362,800).
Rollover IRA accounts
Under BAPCPA funds rolled over from a 401(k), 403(b), and government 457 plan accounts are completely protected, and the full amount is protected in bankruptcy
Inherited IRA accounts
Unfortunately, the Supreme Court has ruled that Inherited IRAs are not protected under BAPCPA in Clark v Rameker.
Creditor Protection
401(k), 403(b), and 457 plans (*that are ERISA plans)
Protection for retirement accounts can go beyond just bankruptcy. For ERISA plans they are fully protected just like bankruptcy EXCEPT for qualified domestic relation orders (QDRO) for divorce and IRS levies. Please be aware these protections apply to plans that are under ERISA and non-ERISA plans do not have the same protections.
Non-ERISA Accounts
There is no federal protection for Traditional IRA or Roth IRA. Instead, creditor protection is provided at the state level and varies. Each state has its own rules on creditor protection, and they can vary. On top of that, some states have different creditor rules for Traditional IRA and Roth IRA accounts. For example, in California, a Roth IRA has no protection but in a Traditional IRA only the “amount necessary for support” is safe and the judge determines what this amount is. If you are doing a rollover an important consideration is if there is a potential need for creditor and bankruptcy protection. If this is the case keeping the assets in an ERISA plan is the best way to go.
