Can I Keep My IRA in Bankruptcy?
In Rhode Island, you can keep your IRA in bankruptcy under most circumstances. When we review your finances we will determine which, if any, of your assets are at risk if you file. In most Chapter 7 filings in Rhode Island, debtors are allowed to keep all of their assets when they file. However, we will know before you file if any of your assets are at risk, and we will make sure you understand that so you can make an informed choice. (See “The Ultimate Guide to Bankruptcy in RI“)
There are two sets of exemptions you can use to protect your assets in Rhode Island, and to help you keep your IRA in bankruptcy. Federal law provides a set of exemptions that protect your property up to certain values and Rhode Island has its own set of exemptions which are intended to protect your property from creditors in any situation. In other words, if someone sues you and gets a judgment against you, under Rhode Island law even if you do not file for bankruptcy protection, they still cannot take your cars, furniture, jewelry, etc. up to specified values.
Bankruptcy is a federal law procedure that is filed in the federal bankruptcy courts. Bankruptcy law allows you to choose between the federal exemptions and the state exemptions. In Rhode Island, you may opt to use the Rhode Island exemptions in your bankruptcy, which in most situations are more advantageous. We will help you decide which exemptions to use but we usually use the Rhode Island exemptions and they do provide more protection than the federal exemptions, even though the federal exemptions are usually sufficient.
You Can Keep More than $1 Million in IRAs in Bankruptcy Using Federal Exemptions
In almost all cases your IRA will be protected in bankruptcy up to a value of $1 million and even more depending on the type of IRA and some other factors. However, this was not always the case. Unlike federal bankruptcy laws that protected 401(k) plans, pensions, and other qualified retirement plans, IRAs only became protected when the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) was enacted in 2005. Before BAPCPA was enacted, the only IRA protections were the ones provided at the state level. (See, “Can You Keep Your House in Bankruptcy?“)
Under BAPCPA, traditional IRAs and Roth IRAs are protected up to a value of more than $1 million. This protection is regularly adjusted for inflation. The inflation adjustment is calculated and enacted every three years. For now, and until April 1, 2022, both traditional and Roth IRAs are protected to a total of $1,362,800. SEP IRAs, SIMPLE IRAs, and most rollover IRAs are fully protected from creditors in a bankruptcy, regardless of the dollar value so it’s almost impossible to lose the money you have in an IRA fund when you file for bankruptcy.
However, under federal law, the total of all your traditional IRA’s and Roth IRA accounts are protected to that amount. In other words, the total value of all of your IRAs is protected in that amount, not each of them. The limit does not apply to each traditional and Roth IRA account held by a given individual, just the total of all of them. However, Rhode Island does give almost blanket protection and is one of the reasons you are more likely to use them so you can keep your IRA in bankruptcy.
You Can Keep Inherited IRAs in Bankruptcy When You Use the RI Exemptions
However, inherited IRAs are NOT protected under federal law. You must use the Rhode Island exemptions to keep your IRA if it is inherited. That is probably the most significant difference in protection between federal exemptions and the Rhode Island exemptions. There are some narrow circumstances where you might end up needing to use the federal exemptions rather than the Rhode Island exemptions. Even if you do need to use the federal exemptions, unless you have an inherited IRA to protect or multiple IRAs that exceed the total exempt value, the federal exemptions provide extensive protection for IRAs even though they are not quite as good as the Rhode Island exemptions.
No Exemptions Protect Your IRA’s From Your Spouse in a Divorce
However, there is one very important exception to the bankruptcy protection provided for IRAs and all retirement funds for that matter, and this is that the exemptions do not protect your from your spouse’s interest in them if you are getting divorced. You are not protected from your spouse’s claim to your retirement funds in a divorce. But for all other creditors, you can keep your IRAs in bankruptcy.