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  • Chris Cyndecki CFA, CFP®

Bankruptcy Protection - Retirement Accounts

Filing for bankruptcy can be a frightening and stressful experience. If you are feeling overwhelmed with debt and are contemplating bankruptcy, knowing the legal protections afforded to you may prevent you from making a costly mistake. ERISA Plans The Employee Retirement Income Security Act of 1974 (ERISA) was established to protect assets placed into retirement accounts during a person's working life. An ERISA plan is an employer-sponsored retirement plan that falls within certain IRS requirements. Assets within retirement plans that meet these ERISA requirements are not included in an individual's bankruptcy estate -- they are protected up to an unlimited amount when filing bankruptcy. Employer sponsored plans such as 401(k)s and 403(b)s are the most common qualified ERISA plans. BAPCPA The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005 extended federal protections to many other non-ERISA retirement accounts including: IRA's, Roth IRA's, SEP-IRA's, and SIMPLE IRA's. The protection for all traditional IRA's and Roth IRA's combined is capped at $1,283,025 (adjusted every 3 years for inflation). Meanwhile SEP-IRA's and SIMPLE IRA's have unlimited protection. BAPCPA also provides protection to assets placed into certain education savings accounts such as Coverdell accounts and 529's prior to two years before filing for bankruptcy (certain restrictions apply).

It is important to know that BAPCPA only shields assets during bankruptcy proceedings. Meanwhile qualified retirement plans under ERISA are protected from both bankruptcy and civil judgments. If you are considering filing for bankruptcy, we strongly recommend speaking with a bankruptcy attorney prior to distributing funds from any retirement accounts.

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