Retirement Accounts in Bankruptcy: 401(k)s, IRAs, and Exemptions

Retirement accounts in bankruptcy are protected far more generously than most other assets, but the shield is not absolute. Employer-sponsored plans like 401(k)s, 403(b)s, and pensions sit entirely outside the bankruptcy estate with no dollar limit. Traditional and Roth IRAs are protected up to $1,711,975 per person. Social Security benefits are fully exempt. The protections depend on the type of account, whether the money is still inside it on the day you file, and whether you handled contributions and rollovers correctly in the years leading up to the case.

401(k)s, Pensions, and Other Employer Plans

Plans governed by the Employee Retirement Income Security Act are excluded from the bankruptcy estate altogether under 11 U.S.C. § 541(c)(2).¹ ERISA requires every qualified plan to include an anti-alienation clause, and the Supreme Court held in Patterson v. Shumate that this clause places the full account beyond a trustee’s reach.²

Because the money is excluded rather than exempted, there is no cap. A 401(k) worth $3 million gets the same treatment as one worth $30,000. The same unlimited protection covers 403(b) tax-sheltered annuities, traditional pension plans, profit-sharing programs, government 457 plans, and certain church plans.¹ The protection continues after you retire, as long as the funds stay inside the plan.

One account type sits in a gray zone. A Solo 401(k) covering only a business owner with no other employees may not technically fall under ERISA Title I, which generally governs plans with common-law employees. Owner-only plans still qualify as tax-exempt retirement funds and receive protection through the bankruptcy exemption statute, but the legal pathway is different and the case law is thinner. If you run a one-person business with a Solo 401(k), raise it with a bankruptcy attorney before filing.

Traditional and Roth IRAs and the Dollar Cap

IRAs follow different rules. They are part of the bankruptcy estate, and protection depends on claiming an exemption on Schedule C of the petition. The authority is 11 U.S.C. § 522(d)(12), which exempts retirement funds held in tax-exempt accounts.³

Traditional and Roth IRAs together are capped at $1,711,975 per person under 11 U.S.C. § 522(n), a figure that applies to cases filed between April 1, 2025, and March 31, 2028, and adjusts for inflation every three years.³ A trustee can reach the amount above the cap. A court may raise the limit if justice requires, but that is a high bar.

SEP IRAs and SIMPLE IRAs are treated better than many people realize. The statute carves “simplified employee pension” and “simple retirement account” plans out of the § 522(n) cap, so the full balance is protected under federal law.³

Forgetting to list the IRA exemption on Schedule C is one of the costliest mistakes in consumer bankruptcy. If you do not claim it, you do not get it, and the window to correct the omission is narrow.

Rollovers from a 401(k) to an IRA

Money rolled from a 401(k) or 403(b) into an IRA does not count against the IRA cap. Section 522(n) excludes “amounts attributable to rollover contributions” from qualified plans along with earnings on those rollovers.³ A $900,000 IRA that began as a 401(k) rollover keeps the same unlimited protection it would have had if the money had stayed in the employer plan.

Documentation decides the outcome. If you rolled funds years ago and later file for bankruptcy, you need records showing the money came from an ERISA-qualified plan: plan distribution statements, custodian records, and bank statements that trace the transfer. Keep them indefinitely. Without the paper trail, a trustee can treat the entire IRA balance as subject to the cap.

Inherited IRAs Are Not Protected

The Supreme Court held in Clark v. Rameker that inherited IRAs are not “retirement funds” within the meaning of the bankruptcy exemption.⁴ The Court pointed to three features: the beneficiary cannot add contributions, must take mandatory withdrawals regardless of age, and can drain the balance at any time without the 10% early withdrawal penalty. The funds are therefore available for current consumption rather than set aside for the beneficiary’s own retirement.

If you inherit an IRA from a parent, sibling, or anyone other than a spouse, the account is fully exposed to creditors in bankruptcy. No federal exemption applies, and the trustee can take the entire balance.

The Spousal Rollover

A surviving spouse has an option other beneficiaries lack. Rolling the inherited IRA into the surviving spouse’s own IRA converts it into personal retirement savings, which then qualify for the standard IRA exemption subject to the $1,711,975 cap.³ A spouse who leaves the funds in an inherited IRA structure faces the same vulnerability as any non-spouse beneficiary under Clark. If financial trouble looks possible, the rollover is the safer move.

Withdrawals Lose Their Protection

Protection depends on where the money sits on the day you file. The moment retirement funds are withdrawn and deposited into a checking or savings account, they lose exempt status and become ordinary cash a trustee can seize. It does not matter that the money came out of a protected account last week. The legal wrapper is gone.

This is where people hurt themselves. Someone drowning in debt cashes out part of a 401(k) to pay bills, then files bankruptcy a few months later. The withdrawn money is now exposed, and the portion left in the account would have been fully protected anyway. Courts look at the status of each asset on the exact filing date.⁵

If funds have already been withdrawn, the federal wildcard exemption can shield a limited amount. Current law covers up to $1,675 in any property, plus up to $15,800 of unused homestead exemption, for a possible total of $17,475.³ Compared to the unlimited protection inside the retirement account, it is a painful trade.

Social Security Benefits

Social Security retirement benefits are fully protected under 42 U.S.C. § 407, which bars any attachment, garnishment, levy, or “other legal process” against the payments and expressly overrides bankruptcy law.⁶ There is no dollar cap, and state law cannot override the protection.

Commingling is the only real risk. If Social Security deposits sit in the same account as paychecks, side income, or gifts, a trustee may struggle to tell which dollars are exempt. Keeping Social Security in a separate, dedicated account avoids the problem.

Chapter 13: Balance Safe, Income Counted

Chapter 13 treats retirement assets with a split personality. The account balance is protected, so a trustee cannot force liquidation of a 401(k) or IRA to fund the repayment plan. But once retirement money leaves the account as income, the rules change.

Pension payments, 401(k) distributions, and IRA withdrawals received during a Chapter 13 case count toward disposable income. Higher disposable income means higher required monthly payments to creditors across the three-to-five-year plan. A retiree living on pension income will see those payments factored into what creditors are owed each month, even though the pension account itself is untouchable.

Ongoing retirement contributions are treated more favorably. Most courts allow continued 401(k) contributions as a reasonable expense that reduces disposable income. If you are repaying a 401(k) loan that will be paid off before the plan ends, expect the trustee to request a step-up, redirecting the freed-up loan payment to creditors.

Outstanding 401(k) Loans

A loan from your own 401(k) is not ordinary debt. You are both borrower and lender, so there is no outside creditor to discharge. The loan survives bankruptcy regardless of the chapter.

In Chapter 7, the balance stays excluded from the estate, but the loan continues to be deducted from your paycheck. Defaulting on it, whether through job loss, plan termination, or missed payments, converts the outstanding balance into a taxable distribution. Income tax applies, and filers under 59½ owe the 10% early withdrawal penalty on top.⁷ Bankruptcy is not on the IRS list of exceptions to that penalty.

In Chapter 13, loan repayments are generally allowed as a necessary expense that reduces disposable income. If the loan is paid off during the plan, however, the cash flow it frees up will likely be redirected to creditors.

Pre-Filing Contributions and Fraudulent Transfer Lookbacks

Moving a large sum into a retirement account shortly before filing is exactly what trustees look for. Under 11 U.S.C. § 548, a trustee can unwind transfers made within two years before filing if they were intended to defraud creditors or were made for less than fair value while the debtor was insolvent.⁸ An unusual lump-sum IRA deposit the month before filing is a textbook red flag.

The two-year federal window is a floor. Trustees can also use state fraudulent transfer laws, which in many states extend the lookback to four years or more. Transfers to self-settled trusts, including certain trust-based retirement structures, carry a ten-year lookback.⁸

Routine payroll contributions at normal levels are almost never challenged. The risk arises from unusual lump sums or dramatic increases in the months before filing. If a trustee successfully avoids a transfer, the money comes out of the retirement account and into the estate.

Retirement Funds Received in a Divorce

Retirement plan assets transferred from a former spouse through a Qualified Domestic Relations Order generally keep their ERISA protection. The QDRO is the one recognized exception to ERISA’s anti-alienation rule, letting a state court divide retirement benefits while preserving the plan’s qualified status.⁹ Once the funds land in your account under a proper QDRO, they get the same protection as other ERISA-qualified assets.

The mechanics matter. If divorce proceeds reached you outside the QDRO process, say as a lump sum deposited into a personal account, the ERISA protection does not travel with them.

State Exemptions and Residency

Federal bankruptcy law allows states to opt out of the standard federal exemption list. In opt-out states, filers use state exemptions instead. Some states protect all retirement accounts with no cap. Others apply a “reasonably necessary for support” standard, letting the judge decide how much you actually need based on age, health, and other income.

The IRA exemption under § 522(b)(3)(C) is an exception to the opt-out system and applies in every state, so the $1,711,975 cap operates as a nationwide floor for IRA protection. State law may offer more.¹⁰

If you have moved recently, which exemption system applies depends on where you lived during the 730 days before filing. If residency was split during that window, the code looks to where you lived for the 180 days before the 730-day period.³ A recent cross-state move can leave you stuck with a prior state’s less favorable exemptions.

Tax Consequences When a Trustee Takes Retirement Funds

When a trustee reaches non-exempt retirement funds, such as an IRA balance above the cap, the tax bill falls on the debtor rather than the creditors. The distribution is taxable income in the year it occurs. If you are under 59½, the IRS also imposes a 10% early withdrawal penalty.⁷

Bankruptcy is not among the IRS exceptions to the penalty. The one “levy” exception on the IRS list applies to levies by the IRS itself, not seizures by a bankruptcy trustee. Losing $100,000 in non-exempt retirement funds can mean $10,000 in penalties plus roughly $22,000 or more in federal income tax, depending on bracket, on money that went to creditors rather than to you. That tax bill becomes its own debt during a period when you are least able to pay it.

1
Office of the Law Revision Counsel. 11 USC 541 – Property of the Estate
2
Justia Law. Patterson v Shumate, 504 US 753 (1992)
3
Office of the Law Revision Counsel. 11 USC 522 – Exemptions
4
Justia Law. Clark v Rameker, 573 US 122 (2014)
5
United States Courts. Chapter 7 – Bankruptcy Basics
6
Office of the Law Revision Counsel. 42 USC 407 – Assignment of Benefits
7
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
8
Office of the Law Revision Counsel. 11 USC 548 – Fraudulent Transfers and Obligations
9
U.S. Department of Labor. QDROs – The Division of Retirement Benefits Through Qualified Domestic Relations Orders
10
GovInfo. Public Law 109-8 – Bankruptcy Abuse Prevention and Consumer Protection Act of 2005