Can Retirement Accounts Be Seized During Bankruptcy?

Most retirement accounts are protected by federal bankruptcy rules. Shutterstock

Some people find themselves under financial stress. When this happens, the possibility of filing for bankruptcy may be imminent. They’re in danger of losing all their assets—everything they’ve worked for.

But what about their retirement accounts? Are they in danger of losing those assets as well? Many people spend a lifetime building these accounts. If you’re considering filing for Chapter 7 or Chapter 13, you’ll need to know the answers to these questions.

Employer-Sponsored Plans Protected

Although some limitations apply to specified accounts, most retirement accounts are protected by federal bankruptcy rules.

Under the Employee Retirement Income Security Act (ERISA), this includes:

• 401(k)
• 403(b)
• profit sharing
• employer-sponsored deferred compensation plans

These are fully protected in bankruptcy without limitations.

BAPCPA Affords Limited Protection

There are specified limited protections for individual retirement accounts (IRAs) and Roth IRAs under the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA).

Until this law went into effect, there weren’t any protections for IRAs and ROTH IRAs.

Signed by President George W. Bush in 2005, the BAPCPA puts limitations on how much money is protected under Chapter 7 or Chapter 13 bankruptcy proceedings for IRAs and ROTH IRAs. Any amount over that figure was and is subject to bankruptcy proceedings.

In 2023, the total protected value for an individual was $1,512,350. Adjustments for inflation are made every three years (the next adjustment is in 2025).

The limited protection applies to the sum of all the IRAs or ROTH IRAs per individual, not to just one individual account. So, if all your accounts add up to more than the protected value, the excess will be subject to bankruptcy proceedings.

The BAPCPA protection varies depending on the IRA type. For example, there are:

• SEP IRAs
• SIMPLE IRAs
• most rollover IRAs

These types of IRAs are protected regardless of their dollar value.

Withdrawing From Retirement Accounts and Bankruptcy

You cannot withdraw money or take out a loan from your retirement accounts during Chapter 7 or Chapter 13 bankruptcy without the court’s permission.

If you’re in Chapter 7, it’s best to wait until your case is completed before you withdraw funds or take out a loan. If you request the court for permission to do so before the proceedings are over, you will incur additional attorney fees, and the process will take longer.

If you’re in Chapter 13, you’ll need to draft the request, with the help of your attorney, and wait for a court hearing. There will also be additional expenses.

For both cases, you’ll need to specify why you need to withdraw. Going on vacation or rehabbing your home is not a reason. But the court will look at fixing an air-conditioning unit, paying for a medical procedure, and other such expenses.

Retirement Distributions Counted as Income

Although most of your retirement accounts are protected during bankruptcy proceedings, the distribution may not be.

The courts look at your income as a means test for allowing you to declare Chapter 7 or convert it to Chapter 13 bankruptcy. One element factored into bankruptcy is your income.

The income calculation includes various sources, including pension and retirement income (excluding Social Security benefits).

If you are retired and receiving these distributions, they are considered part of your assets. But to clarify, it still doesn’t count the funds in the accounts, only the funds you have received.

When Can the Government Seize Retirement Accounts

Although your retirement accounts may be protected under ERISA and BAPCPA from your creditors in a bankruptcy proceeding, the same rules don’t apply to the IRS.

Whether you’re in bankruptcy or not, the IRS has the right to levy on your property to collect unpaid federal taxes. This includes your retirement accounts.

This is not a common occurrence and only occurs after a tax lien has been enacted.

It isn’t authorized to impose a tax levy on your retirement accounts if you have a current or pending payment plan.

The IRS has the right to levy up to 15 percent of each Social Security payment for overdue federal tax debt until the debt is paid.

Your retirement accounts, including Social Security, can also be seized to pay child support and alimony that are in arrears.

Using Retirement Funds to Avoid Bankruptcy

You may be tempted to withdraw from your retirement funds to pay creditors and avoid bankruptcy, but consider the penalties that you would incur.

There are the possibilities of tax penalties, income tax, early-withdrawal penalties, losing protection of inherited IRAs, and losing company matches from your retirement plan if you’re still working.

Most Retirement Funds Protected From Bankruptcy

If you must declare bankruptcy and you have retirement accounts, these assets are usually protected. Under ERISA, employer-sponsored plans are protected. You’ll also have protection for IRAs and Roth IRAs under the BAPCPA.

Your Social Security benefits are also protected.

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