The uncertain state of the economy has many people wondering how does declaring bankruptcy effect retirement funds? Generally speaking, retirement funds are protected from bankruptcy, but you should be prepared to protect yourself by knowing your rights. Recent amendments to federal and state laws have extended bankruptcy protection for several kinds of retirement funds.
- Know what kind of retirement fund you have. There are two basic kinds of retirement funds. Traditional individual retirement accounts (IRAs) are savings plans that are tax deductible up to $4,000. Employer-sponsored retirement funds include pensions, 401(k) plans, and profit sharing. Different types of retirement plans are differently affected by bankruptcy. The Internal Revenue Code (IRC) exempt IRA and Roth IRAs, pensions, profit sharing plans, stock plans, and annuities from bankruptcy for up to $1,000,000 per spouse.
- Fund your retirement plan properly. Protections for retirement plans do not extend to cover retirement funds that were improperly funded or created fraudulently. Some IRAs are called retirement funds so federal taxes are not witheld, but they are treated as additional savings plans from which a person routinely removes money . Claiming these as retirement funds is considered fraud.
- Know your state laws. Federally or employee-sponsored retirement plans like pensions are protected from bankruptcy, but states set their own regulations for IRAs. For example, in Pennsylvania, any IRA funds in excess of $15,000 are not protected from debtors or through bankruptcy.
- Review the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. BAPCA was designed to protect banking and credit card companies by imposing tougher rules for bankruptcies. BAPCA also included changes to retirement funds in bankruptcy. Under the act, any retirement funds that are qualified as untaxable are protected from creditors during bankruptcy up to $1,000,000. Previously, the exempt funds were limited to what was considered necessary for basic subsistence, but the new law extends the limit.