Retirement Accounts and Bankruptcy: Are You Protected?

As the US economy—and the thousands of small businesses that make up a large part of it—continues to navigate the uncharted waters of a worldwide pandemic, many business owners are facing increased challenges as they seek to find a path back toward profitability. Many have pivoted to new workflows, innovative product lines, and other strategies in an effort to survive until the economy gets back on a more normal footing. But other business owners and professionals are coming to grips with the very real possibility of bankruptcy as they watch previously dependable sources of income dry up.

Business owners and professionals in dire financial straits have traditionally looked to their retirement accounts as a potential source of capital or income when rebuilding or trying to survive a prolonged financial “dry spell.” And, while personal or business bankruptcy is a last resort, it is important to know what types of assets are protected from creditors during bankruptcy and which are not. Let’s take a look at the different types of retirement accounts and the varying levels of protection they enjoy during bankruptcy proceedings.

The principal protection for retirement accounts derives from the Employment Retirement Income Security Act of 1974 (ERISA). This federal law affords unlimited protection to assets held in qualifying plans, protecting them not only from claims of creditors if a plan participant declares bankruptcy, but also protecting the assets held in a company plan in the event the sponsoring company declares bankruptcy. Typically, employer-sponsored plans such as 401Ks, pension, and profit-sharing plans must conform to ERISA rules and are thus qualified for protection. Coverage by federal law is important, because the rules for bankruptcy vary widely from state to state. Since federal law supersedes state law, however, ERISA-qualified plans are often considered the “gold standard” for protection from creditors during bankruptcy.

But what about your IRA? Most IRAs, whether traditional or Roth, are not ERISA-qualified. Fortunately, another federal law, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), shields the assets in your IRA account from creditors in the event that you are forced to declare bankruptcy. Some states also offer similar bankruptcy protection to IRAs, but many do not, so it’s important to consult a bankruptcy attorney who practices in your state if you are considering this course of action. BAPCPA protects IRA assets up to an inflation-adjusted cap that currently sits at $1,362,800. Rollover funds in an IRA that originated in a 401K also enjoy unlimited bankruptcy protection under federal law.

Bankruptcy is an option that no one wants to think about. But if worse comes to worst and this is the only way to protect yourself from the claims of creditors, it’s important to know what protections are available to your retirement account assets under federal and state law.

If you have questions about the options available to your business for negotiating these current tough times, please reach out to set up a confidential conversation. To listen to my podcast on David Holland’s Real Money, “Traditional or Roth IRA?” please click here.

Stay Diversified, Stay YOUR Course!



Empyrion Wealth Management (“Empyrion”) is an investment advisor registered with the U.S. Securities and Exchange Commission under the Investment Advisers Act of 1940. Information pertaining to Empyrion’s advisory operations, services and fees is set forth in Empyrion’s current Form ADV Part 2A brochure, copies of which are available upon request at no cost or at The views expressed by the author are the author’s alone and do not necessarily represent the views of Empyrion. The information contained in any third-party resource cited herein is not owned or controlled by Empyrion, and Empyrion does not guarantee the accuracy or reliability of any information that may be found in such resources. Links to any third-party resource are provided as a courtesy for reference only and are not intended to be, and do not act as, an endorsement by Empyrion of the third party or any of its content. The standard information provided in this blog is for general purposes only and should not be construed as, or used as a substitute for, financial, investment or other professional advice. If you have questions regarding your financial situation, you should consult your financial planner or investment advisor.

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