Your IRA and the Bankruptcy Shield: What You Need to Know

Since 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) has provided substantial protection for individual retirement accounts (IRAs). This law has been a positive step towards safeguarding people’s retirement savings. 

Different types of IRAs offer different types of protection. For instance, traditional IRAs and Roth IRAs are currently protected up to a value of over $1.5 million. Meanwhile, SEP IRAs, SIMPLE IRAs, and most rollover IRAs enjoy complete protection from creditors in bankruptcy, regardless of their dollar value.

In What Ways Are IRAs Affected By Bankruptcy?

Before the enactment of BAPCPA, 401(k) plans, pensions, and similar employer-sponsored qualified retirement plans enjoyed federal bankruptcy protections, while IRAs did not. BAPCPA changed this landscape by introducing explicit federal bankruptcy protections for IRA assets. In the past, IRA protections were defined at the state level or were nonexistent. After its passage, citizens in all states became eligible for bankruptcy protection for their IRA assets.

Roth IRAs vs. Traditional IRAs: How Much Protection Do They Provide?

BAPCPA modified federal bankruptcy law to protect up to $1 million in assets held in traditional IRAs or Roth IRAs. To account for inflation, the law mandates regular adjustments using the Department of Labor’s consumer price index for all urban consumers (CPI-U). This adjustment occurs every three years. As of April 1, 2024, traditional and Roth IRAs are now protected up to a total dollar value of $1,512,350 per person. 

It is important to note that the protection applies to the combined balance of all traditional and Roth IRA accounts owned by an individual rather than to each account separately. Additionally, amounts exceeding $1,512,350 are not protected under BAPCPA. However, bankruptcy courts can provide additional protection if deemed just by the judge.


Simplified Employee Plan (SEP) IRAs and Savings Incentive Match Plans for Employees of Small Employers (SIMPLE) IRAs are fully protected from bankruptcy. These protections are on par with those provided to other employer-sponsored individual retirement accounts, such as 401(k) and profit-sharing plans.

Special Protection For Rollover IRAs

Under BAPCPA, a rollover IRA refers to a traditional or Roth IRA funded through a transfer from a qualified retirement plan. These qualified plans encompass standard 401(k) plans, traditional pension plans, and certain profit-sharing plans. Properly executed rollover IRAs originating from qualified retirement plans receive complete protection from creditors in bankruptcy.

When rolling over assets from a qualified retirement plan to an IRA, it is advisable to establish a separate IRA account, distinct from any existing traditional or Roth IRA. While not explicitly required by law, maintaining separate accounts simplifies asset documentation and tracking, facilitating the application of all available bankruptcy protections.

Accounting For Inflation In Bankruptcy 

Every three years, the federal government adjusts the protection limit for traditional and Roth IRAs for inflation. Starting in 2024, these IRAs will be safeguarded up to a balance of $1,512,350. Other accounts do not require the inflation adjustment because they are fully protected in bankruptcy, including SEP IRAs, SIMPLE IRAs, and 401(k).

Is My IRA Frozen If I Decide To Declare Bankruptcy?

In bankruptcy, IRAs and other retirement accounts are generally protected from creditors. However, exceptions exist. Government authorities may seize a portion of your retirement accounts if you are convicted of a crime and imprisoned. There may also be no protection if the claimant is a former spouse or the IRS.

Is It A Good Idea To Withdraw Money From My IRA During Bankruptcy?

Before making any decisions regarding IRA or 401(k) distributions in bankruptcy, it’s advisable to consult with a bankruptcy attorney. While these accounts are generally protected from creditors, withdrawals may not be shielded and could be used to repay debts. Moreover, you may require court permission to withdraw or borrow against your retirement account, potentially incurring additional legal fees.

The Bottom Line

Thanks to BAPCPA, IRAs and most other retirement accounts are safeguarded from creditors, even in the event of bankruptcy. However, certain limitations exist, and the full protection of traditional or Roth IRAs is limited up to a specified amount. Nevertheless, some accounts enjoy complete protection, regardless of their balance.