By Joe Cicchinelli, IRA Technical Expert
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As of April 1, 2013, the maximum bankruptcy exemption amount for IRAs increased from $1,171,650 to $1,245,475. This exemption amount is subject to cost-of-living adjustments (COLAs). Since most Americans don’t have IRA balances anywhere near $1 million, the IRAs of almost everyone will be fully protected from their creditors if they declare bankruptcy.
Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), the first $1 million of IRA and Roth IRA funds are protected (or exempt) in bankruptcy. This amount is reviewed every three years and increased as needed. For example, the $1 million base amount increased to $1,171,650 in April 2010, and now is increased to $1,242,475.
The new $1.2 million exemption amount does not apply to SIMPLE and SEP IRAs because these IRA based employer plan assets are fully protected in bankruptcy in an unlimited dollar amount.
There is also no maximum exemption for assets in employer retirement plans such as a 401(k). Anyone who has IRAs that exceed the new $1.2 million exemption amount should consider rolling over their IRAs into their employer plan to get the unlimited creditor protection. Note that not all employer retirement plans accept rollovers from IRAs, so check with your employer’s plan administrator.
The $1 million limit does not apply to assets that were rolled over from an employer plan and into an IRA. Because these rollover funds and their earnings are fully protected from creditors, if you ever file for bankruptcy, it’s probably easier if those rollover assets are kept in a separate IRA.
The bankruptcy exemption amount only protects your IRA money if you declare bankruptcy. There are instances when your IRA can be taken. For example, if you get a divorce, some or all of your IRA can be awarded to your ex-spouse. Also, if you owe the IRS money, the IRS can take (levy) your IRA.