November 29, 2015

45869244_sWhen it comes to creditors and other parties that make claims on your savings and finances, very little can be considered sacred. Depending on factors such as where you live, individual retirement accounts or IRAs are among the assets that may or may not be garnished by a creditor or individual to whom you owe money to.

 The Employment Retirement Income Security Act of 1997, more commonly known as ERISA, extends protection against all types of creditors to various kinds of retirement plans both inside and outside bankruptcy. Unfortunately, this protection does not completely cover IRAs. For anything other than a bankruptcy, IRA and Roth IRA protection from creditors is dependent on state law.

 If you reside in Colorado and do not file for bankruptcy, then state laws dictate that your IRA enjoys full protection from creditors.

But what happens to your IRA if you file for bankruptcy?

Based on the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 or BAPCPA, it is generally more difficult for individuals to protect their assets in the event of a personal bankruptcy—except for IRAs. In fact, the law provides more protection to IRAs in federal bankruptcy proceedings.

Under the BAPCPA, up to $1 million worth of assets held in traditional IRAs and Roth IRAs, or a larger amount if determined by the bankruptcy court, will be considered exempt from a bankruptcy estate. Employer-sponsored IRAs, on the other hand, are protected in bankruptcy proceedings without a dollar limit. In addition, IRA assets stemming from an employer retirement plan rollover will not be subject to creditor claims, regardless of the value of the rollover assets or the state the individual resides in.

According to bankruptcy rules, your IRA account is legally protected from claims of creditors if you file for bankruptcy. This means that you may be able to undergo bankruptcy and have all your debts discharged, yet still retain all the money in your IRA. This rule was designed to help debtors undergoing bankruptcy experience a fresh start.

For inherited IRA accounts, the rules differ. If the holder of the inherited IRA is someone other than the initial account owner’s spouse, then he or she will no longer benefit from the bankruptcy exemption.

 While your IRA may enjoy protection from general creditors under the U.S. Bankruptcy Code, your retirement account may not be completely safe if your creditor is the Internal Revenue Service or another government organization. The IRS will probably not force these funds out of your account, but it still may be able to take a portion or all distributions you withdraw from your IRA and other accounts. Other creditors may also grab the money involved when it is withdrawn from your IRA.

Please note that if your IRA is the only remaining resource you have to pay off your debts, you should seek help from a knowledgeable tax attorney and consider filing for personal bankruptcy.

Categories: Blog, IRS, Taxpayers' Rights