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By Logan Weinkauf
Founding Attorney

Many clients who consider filing for bankruptcy relief worry that the bankruptcy trustee or their creditors will take their retirement funds. The good news is that bankruptcy exemptions protect most retirement funds. In this blog, our New Bedford bankruptcy attorney discusses bankruptcy do’s and don’ts to keep retirement funds safe in a Massachusetts bankruptcy case.

What Is a Bankruptcy Exemption?

The first thing to understand about retirement accounts and bankruptcy is the protection provided by bankruptcy exemptions. A bankruptcy exemption is a federal or state law that protects property in bankruptcy. It creates exempt property that cannot be seized and sold to satisfy debts.

The Federal Bankruptcy Code includes a list of bankruptcy exemptions covering various assets, including many retirement accounts. However, states can opt out of the federal exemptions and require debtors to use state exemptions. Massachusetts allows debtors to choose between federal or state bankruptcy exemptions.

Massachusetts and federal bankruptcy exemptions differ in the types of property protected and the amount of equity protected in specific assets. Therefore, you should work with an experienced New Bedford bankruptcy lawyer to ensure you choose the bankruptcy exemptions that give you the most protection for retirement accounts when you file a bankruptcy case.

Examples of Retirement Accounts That Are Exempt in Bankruptcy

Many of the most common retirement accounts workers and individuals use to save for retirement are exempt from bankruptcy. Examples of exempt retirement accounts include, but are not limited to:

  • IRA Accounts – Individual Retirement Accounts (IRAs) are typically exempt in all bankruptcy chapters. IRAs consist of pre-tax dollars.
  • Roth IRA Accounts – Roth IRAs are similar to traditional IRAs. The primary difference is that the money used to fund a Roth IRA is after-tax funds.
  • 401(k) Accounts – Many employers offer their employees 401(k) accounts as a way to save for retirement. Pre-tax money is withheld from the employee’s check and deposited into the 401(k) account. Some employers match a specific percentage of the employee’s deposits.
  • 403(b) and 401(a) Accounts – These accounts are similar to 401(k) accounts, but they are set up for education and non-profit institutions. The funds deposited to these accounts by employees are pre-tax dollars.
  • Other Exempt Retirement Accounts – In addition to the standard retirement accounts listed above, other retirement plans that are generally exempt in bankruptcy include defined benefit, profit sharing, Keough, and money purchase plans.

Talk with a bankruptcy lawyer before withdrawing retirement funds to pay creditors or transferring money from a retirement account. The funds in your retirement accounts could be protected, provided you leave them in the accounts. You may qualify for bankruptcy to get rid of debts you cannot afford to pay without losing the money you worked hard to put away for retirement.

Are There Exceptions to Retirement Plans Being Exempt in Bankruptcy?

Almost all ERISA-qualified retirement accounts are protected in bankruptcy. However, the protection is limited. The funds in these accounts are protected from creditors, provided the funds remain in the account. If you withdraw the funds, you might lose some or all of the money unless there is a cash or wildcard exemption to cover the amount withdrawn.

Additionally, the funds exempted in traditional and Roth IRAs are limited. As of 2022, the limit is $1,512,350 per person. Funds above the maximum exemption could be used to pay your creditors. The amount will adjust again for inflation in 2025.

There could be other exceptions to the bankruptcy exemptions for retirement accounts. Talk with a lawyer about your accounts and how filing for bankruptcy impacts your retirement funds. 

Contact Logan A. Weinkauf, P.C., to Learn More About Protecting Retirement Accounts in Bankruptcy

A misstep when filing bankruptcy could cause your retirement accounts to lose their protection. Call Logan A. Weinkauf, P.C., to meet with an experienced bankruptcy lawyer in New Bedford, Massachusetts. We’ll help you take steps to protect your retirement accounts while you seek relief from the bankruptcy court.

About the Author
Logan represents individuals and small businesses in the U.S. Bankruptcy Courts in Boston, Worcester, Springfield, and nearly every county court in Massachusetts. He approaches each case with empathy for the people behind the case. He works efficiently to deliver cost-effective solutions. He has advised people and businesses on creditor and debtor matters across diverse areas of law, including corporate law, real estate, and family law issues. This puts Logan at the leading edge of debtor’s rights, asset protection, and litigation. Logan is a trusted advisor to individuals, families, entrepreneurs, and business owners.