11 Feb Will my Individual Retirement Account be taken if I file bankruptcy?
The U. S. Supreme Court ruled unanimously on April 4, 2005 that under section 522(d)(10)(E) of the United States Bankruptcy Code (11 U.S.C. § 522(d)(10)(E)), a debtor in bankruptcy can exempt his or her IRA, up to the amount necessary for retirement, from the bankruptcy estate. The Court indicated that because rights to withdrawals are based on age, IRAs should receive the same protection as other retirement plans.
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 expanded the protection for IRAs. Certain IRAs (rollovers from SEP or Simple IRAs, ROTH IRAs, individual IRAs) are exempt up to at least $1,000,000 (adjusted periodically for inflation) without having to show necessity for retirement. The law provides that “such amount may be increased if the interests of justice so require.” Other IRAs (rollovers from most employer sponsored retirement plans (401(k)s, etc.) and non-rollover SEP and SIMPLE IRAs) are entirely exempt.
Many people are afraid of filing bankruptcy because they have substantial money in their IRA or 401(K) that they do not want to be taken by the Trustee. They should not be fearful because based on Federal law the a person’s IRA and 401(K) is exempt from bankruptcy whether they file Chapter 7 or Chapter 13. The purpose of the law is to make the money available to the person when he or she retires.
Question: My lender is suggesting that I take out money from my IRA to pay my mortgage. Is this a good idea?
Answer: That is a big No – No. Many people when they have no money withdrew from their IRA to pay their mortgage only to discover that they owed IRS for the penalty and taxes applicable to the amount withdrawn. The penalty is 10% plus your tax rate of 20% or higher.
Question: Since my IRA is exempt from bankruptcy do I have to declare it?
Answer: Yes. All exempt properties are part of the estate of the person filing bankruptcy. The IRA and all properties of the debtor have to be declared in the bankruptcy petition. The trustee could not touch or do anything on the debtor’s exempt property. Only the non-exempt properties are subject to distribution to creditors.
Question: What similar plans are covered by the same provision as to exemption from creditors?
Answer: Other plans which include 403(b), profit sharing and money purchase plan, SEP and SIMPLE IRA, and Defined benefit plan are also exempt from the reach of creditors when filing bankruptcy.
Note: This is not a legal advice.