Protecting retirement funds in bankruptcy

Are you worried about whether you can keep your hard-earned pension money if you file bankruptcy? Thankfully, funds in a qualified retirement or pension plan are almost always exempt in a bankruptcy.

If you are considering filing for bankruptcy, you may be wondering if you'll be able to keep your hard-earned pension money and other property. Thankfully, federal and state laws provide liberal exemptions for personal property and a wide variety of other personal assets, including household belongings, home equity cash and other assets. Funds in a qualified retirement or pension plan are almost always exempt in a Connecticut bankruptcy up to $1 million.

Proper exemptions for different types of plans

Employer-sponsored retirement plans receive broad protection against bankruptcy creditors. The Employee Retirement Income Savings Act (ERISA) protects pension plans or 401(k) accounts from all but a few creditors, including the Internal Revenue Service or a spouse.

Someone considering bankruptcy might consider liquidating these accounts and moving the money into personal checking or savings accounts; this isn't a good course of action. Retirement accounts, 401Ks, Roths and other pension assets are protected to $1 Million Dollars, so don't move money from the protected accounts to un protected bank accounts. You could also face significant penalties or taxes for early withdrawal.

Federal bankruptcy laws protect as "exempt" traditional and individual retirement accounts or Roth IRA funds of $1 million or less. This also includes money that is "rolled over" from a company plan into a traditional IRA keeps its exempt status regardless of the value. This means that a bankruptcy filer could roll over retirement or pension funds from a company-sponsored account into a private one without fear that the money would be subject to seizure in a bankruptcy.

Recent Supreme Court decision articulates rules for inherited IRAs from parents or other non-spouses

While self-funded and rollover accounts receive protection in bankruptcy, certain inherited accounts may not be protected in bankruptcy.

In a recent U.S. Supreme Court case, (Clark v. Rameker) a Wisconsin couple filed for bankruptcy after their pizza shop went out of business. The couple's main asset was an IRA that the wife inherited from her mother. The bankruptcy trustee wanted to access funds in the account to pay off creditors.

The court decided that an inherited IRA from someone other than a spouse does not receive the same bankruptcy protections. The court distinguished these accounts, because an owner cannot add funds to an inherited IRA. The other main difference was that an owner could take out funds at any time and actually was required to take out the entire balance or receive minimum annual disbursements within a short time frame.

Assuring protection of inherited IRAs and Pensions in Connecticut

While seven states provide protection for nonspousal inherited IRAs, Connecticut is not one of them. Following this new decision, consulting with an expert bankruptcy attorney who performs a careful and comprehensive sourcing of funds is critical.

If you are concerned about protecting retirement funds from creditors, be sure to work with a specialized bankruptcy attorney. He or she can advise you about the best option to stop creditor harassment and obtain a fresh financial start while protecting your assets.

Keywords: bankruptcy, exempt, retirement funds, pension plans, IRA