Can’t pay your bills? Car repossessed! Checks returned marked ‘insufficient funds’! This is an all too common scenario for some anxious individuals who may be forced to file for bankruptcy largely as a result of living in current strained financial times.
However, just because you filed for bankruptcy does not mean your life is over. It simply means you are starting over financially. What does this mean to your existing individual retirement account or Roth IRA? Will this further disrupt any of your plans for retirement? The question mark can lead to a lot of anxiety regarding your future retirement, especially when creditors are seeking their claim. Thankfully, times have changed and bankruptcy no longer carries the social stigma it once did. There are practicalities to consider. If you’re still young you are likely to work through the problem until discharged. But about those middle aged or older? How will your IRA savings fund you have funded for many years of your working life be affected?
IRA exemption amounts
An individual forced into this situation that has been dutifully saving for his or her retirement will find that part of any retirement fund is exempt from the bankruptcy regulations, thereby preventing creditors from getting their hands on it to settle outstanding debts. From April 1st 2016 that exemption amount was increased for IRA accounts from $1,275,475 to $1,362,800: the change has been widely welcomed. The majority of Americans do not have IRA accounts with deposits approaching anywhere near the exemption amount; almost all holders’ funds will therefore be protected. *
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 created the exemptions, and they apply to both traditional and Roth IRA accounts. Reviews of the exempted amounts are carried out every three years and increases are applied as and when needed; however, it should be noted that this particular exemption is not applied to SEP and SIMPLE IRA accounts. These are employer based savings accounts and already offer unlimited protection.
It should also be noted that there is no maximum on exemptions for employer retirement savings, such as the 401(k). For those that do have IRA accounts that total more than $1,362,800 it is worth considering moving some funds into an employer plan in order to take advantage of the unlimited protection. This needs to be checked out in advance, as not all employer plans will accept fund transfers from IRA accounts.
The exemption limit will not apply to assets moved from an employer plan into an IRA. Those funds and the earnings from them are already fully protected from creditors and as a result it is recommended that these be kept in a separate IRA.
* The bankruptcy exemption amount for IRA accounts will only apply if bankruptcy is formally declared, and there may be some circumstances when others could access the funds. This might happen in the event of a divorce, with part of the retirement fund being awarded to the ex-partner. As usual the government is a special case; the IRS can draw on the funds if there is an outstanding tax bill to settle.