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Are all retirement investments safe during bankruptcy?

One of the biggest fears that a New Yorker may have about filing for bankruptcy is losing any retirement savings that he may have accrued during his lifetime. Bankruptcy can wipe a person's financial slate clean, sometimes including accounts he had set up for the purposes of eventually retiring. For some, the idea of working indefinitely can be even more terrifying than subjecting oneself to the regulations of the federal bankruptcy courts.

However, according to information provided by the American Institute of CPAs, some retirement accounts are protected or exempt during bankruptcy proceedings. For example, under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, not all retirement investments are subject to liquidation, garnishment or other actions by bankruptcy creditors. Employer-run individual retirement accounts are generally safe from bankruptcy, though private traditional and Roth IRAs may be pursued by creditors in bankruptcy proceedings.

There is some uncertainty as to whether individual retirement accounts that were inherited by debtors are protected from bankruptcy proceedings. It seems that when inheritance occurs from a deceased spouse those accounts are protected. When they are from other non-spousal parties, protection is not guaranteed. Also, engaging in illegal or forbidden investment activity with an otherwise protected IRA may cause that account to lose its exemption. A bad act could force a debtor to liquidate his retirement investment in order to pay off those he owes money.

The laws regarding bankruptcy and retirement are not without some ambiguity. Individuals with questions about personal bankruptcy should seek guidance regarding their specific legal questions. No one answer can address all possible legal scenarios, and for that reason this post should not be read as specific legal advice. Its intent is to provide a general introduction to the topic of retirement savings and bankruptcy in order to prompt further inquiry for those facing such difficult legal situations.

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