Retirement Accounts -- Are They Protected?

The short answer is yes -- most retirement accounts are fully protected in bankruptcy. But the details matter, especially for IRAs and inherited accounts.

The Good News: Most Retirement Funds Are Safe

Retirement accounts are among the most protected assets in bankruptcy. Congress and the courts have consistently held that people should not be forced to deplete their retirement savings to pay current debts. The protections come from multiple sources:

The practical result: in almost every case, your 401(k), pension, and IRA are completely safe from creditors and trustees in bankruptcy.

Protection by Account Type

Account Type Protection Level Dollar Limit Source of Protection
401(k) Fully exempt Unlimited ERISA + 522(b)(3)(C)
403(b) Fully exempt Unlimited ERISA + 522(b)(3)(C)
Defined-benefit pension Fully exempt Unlimited ERISA + 522(b)(3)(C)
457(b) (government) Fully exempt Unlimited 522(b)(3)(C)
Traditional IRA Exempt with cap $1,512,350 522(b)(3)(C) + 522(n)
Roth IRA Exempt with cap $1,512,350 522(b)(3)(C) + 522(n)
SEP IRA Fully exempt Unlimited ERISA (employer contributions)
SIMPLE IRA Fully exempt Unlimited ERISA (employer contributions)
Inherited IRA NOT exempt $0 Clark v. Rameker (2014)

ERISA Plans: Bulletproof Protection

Employer-sponsored retirement plans governed by ERISA -- including 401(k)s, 403(b)s, and defined-benefit pensions -- have the strongest protection. Under ERISA's anti-alienation provision (29 U.S.C. Section 1056(d)), these funds cannot be assigned or alienated. The Supreme Court confirmed in Patterson v. Shumate (1992) that ERISA-qualified plans are excluded from the bankruptcy estate entirely.

This protection is unlimited -- there is no dollar cap. A debtor with $5 million in a 401(k) keeps all of it. And because the protection comes from ERISA (a federal law outside the Bankruptcy Code), it applies in every state, including opt-out states.

Key point: ERISA protection means your 401(k) and pension are safe regardless of which state you live in, regardless of whether your state has opted out of federal bankruptcy exemptions, and regardless of the balance.

IRAs: The $1,512,350 Cap

Traditional and Roth IRAs do not have ERISA protection (because they are not employer-sponsored). Instead, they are protected under Section 522(b)(3)(C) and 522(d)(12), with a cap set by Section 522(n).

The current cap is $1,512,350 for all combined IRA balances (traditional plus Roth). This cap is adjusted every three years for inflation. For most people, this is more than sufficient -- the median IRA balance is well under $100,000.

Important: the cap applies only to amounts that are "retirement funds" within the meaning of the statute. Rollovers from ERISA plans into IRAs are generally protected without limit, because they originated as ERISA-protected funds. Courts in most circuits hold that the IRA cap does not apply to rollover amounts.

The Inherited IRA Trap

In Clark v. Rameker (2014), the Supreme Court unanimously held that inherited IRAs are not "retirement funds" within the meaning of the Bankruptcy Code. The reasoning: inherited IRA holders cannot contribute to the account, must take required distributions regardless of age, and can withdraw the entire balance at any time without penalty. These features make inherited IRAs more like a general savings account than a retirement vehicle.

This means: If you inherited an IRA from a parent, sibling, or anyone other than your spouse, that money is NOT protected in bankruptcy. The trustee can seize it to pay your creditors.

Exception: Spousal inherited IRAs are treated differently. A surviving spouse can roll an inherited IRA into their own IRA, which restores full protection. This rollover option is not available to non-spouse beneficiaries.

Common Mistakes to Avoid

Legal References