Will Filing for Bankruptcy Affect My IRA?

Filing for bankruptcy can have a lot of effects on your life. Your credit score may be lowered for a time, and you may not be able to do many activities because a lot of your assets are going toward paying off creditors. Because creditors are taking assets, some people undergoing bankruptcy proceedings may be worried as to whether bankruptcy will affect retirement accounts.

Most retirement accounts are protected when you are dealing with bankruptcy. However, such protection will depend on the chapter of bankruptcy you file under, your means, and whether or not you are already retired when you file for bankruptcy. Moreover, withdrawals from an IRA or other retirement account can affect bankruptcy proceedings, even to the point of making you ineligible for some chapters of bankruptcy. Additionally, your retirement income and withdrawals are only protected up to certain amounts, so withdrawals and income beyond that can be liquidated in bankruptcy. For that reason, it is important to talk to legal counsel about your situation so you can get specific advice on what to do.

To talk to our team of bankruptcy lawyers about your situation, call Young, Marr, Mallis & Associates at (215) 701-6519 for Pennsylvania and (609) 755-3115 for New Jersey.

What is an IRA?

An IRA is an individual retirement account. It lets you save money for retirement in a way that allows it to grow without getting taxed. There are three types of individual retirement accounts. The main difference between these types of individual retirement accounts is how a tax on the money you put in is treated.

Traditional IRA

Traditional IRAs allow you to collected interest on tax-free contributions. You put money into a traditional IRA before it is taxed. It then grows at the specified interest rate – tax free. That income is only taxed when you make withdrawals from the IRA account. You may also be able to get certain tax deductions when contributing to a traditional IRA. .

Roth IRA

A Roth IRA, on the other hand, does not subtract from your taxes for the year that you put the money in. However, the distributions from a Roth IRA do not have any extra tax implications – you already paid the tax on the year you invested the money. The downside when compared to a traditional IRA is that you do not get a tax deduction for putting money into a Roth IRA.

Rollover IRA

A rollover IRA refers to a tax-free way to transfer money from one IRA to another. This usually happens when you are transferring money from an old employer’s IRA to a new one. Rollover IRAs also do not have contribution limits.

How Does Filing for Bankruptcy Affect IRAs?

Now that you have a basic understanding of the different kinds of IRAs, we can go into how each kind of IRA is affected by bankruptcy proceedings. When you file for bankruptcy, your assets are put into what is called a bankruptcy estate. Your assets include income, property, bank accounts, and, relevant to our purposes, individual retirement accounts. Normally, anything in the bankruptcy estate can be “liquidated” – turned into cash – to pay off creditors. However, there are special rules for IRAs, even though they are part of the bankruptcy estate.

Retirement Accounts Are Protected

During bankruptcy proceedings, most kinds of retirement accounts are protected up to certain amounts from being used to pay off creditors. Generally, funds put into traditional or Roth IRAs are protected from bankruptcy if they were placed there within a year prior to filing for bankruptcy. Additionally, most, but not all, rollover IRAs are protected in this way. However, this does not apply if income was put into an account to avoid having it be up for grabs in bankruptcy – that would be fraud.

State and Federal IRA Protections

Additionally, there are different IRA protections at the state and federal level. The federal level of protection changes every three years, adjusting for inflation. At present, the amount protected federally is $1,512,350. Remember, though, that is the total amount for all IRAs, so if you have multiple accounts that exceed this amount, not all of it will be protected.

State protections will, naturally, vary from state to state. Some states will allow for full protection of retirement accounts, while others will follow the federal framework.

Remember, though, that IRA protections only work when the money is in an individual retirement account. Once you take money out of the account, creditors are able to liquidate it to pay off debts. For example, if you empty your traditional IRA early, paying all associated fees, that income is now up for grabs in bankruptcy because it is no longer in an individual retirement account.

Does Retirement Income Affect Bankruptcy?

If you are already retired when you file for bankruptcy, that may have an effect on how your retirement accounts and the income you get from them are treated. The effect this can have may change depending on the Chapter of bankruptcy you are filing under.

Chapter 7 Bankruptcy

To be eligible for Chapter 7 bankruptcy, you have to be below a certain income threshold. This is because Chapter 7 is designed for individuals with few assets. When the court assesses your means to determine the best chapter of bankruptcy for you, it takes into account any income you get from pensions or retirement accounts, including IRAs. If your payouts from retirements accounts are high enough, you may not qualify for filing under Chapter 7.

Chapter 7 allows you to keep things you need to support yourself, but most anything else can be used to pay off creditors. This includes any “excess” income from retirement accounts that are not considered essential to supporting your life. If you are concerned about this, you should discuss your situation with our bankruptcy lawyers.

Chapter 13 Bankruptcy

Chapter 13, in contrast to Chapter 7, lets you take a more active role in reorganizing things during proceedings. For example, you are able to “earmark” certain assets as exempt from being used for debt collection. However, the debt you are expected to pay your creditors is based on your income. So, the higher your income, the more you will need to pay. Retirement income from an IRA could factor into that calculus.

Call Us and Talk to a Bankruptcy Lawyer Today

If you are concerned about your situation, call Young, Marr, Mallis & Associates and have a chat with one of our bankruptcy lawyers by dialing (215) 701-6519 for Pennsylvania and (609) 755-3115 for New Jersey.