Retirement · Beverly Hills
Retirement Accounts, 401(k)s and Pensions in Bankruptcy
Retirement accounts, 401(k)s and pensions are usually protected in bankruptcy, and most people keep every dollar. Employer plans are generally outside the case entirely, and most IRAs are protected up to a high federal limit. Call (310) 362-9071 before you touch a retirement account to pay debts.
- 401(k)s and pensions covered by federal retirement law are generally not part of your bankruptcy estate
- Traditional and Roth IRAs are protected up to a federal cap
- Inherited IRAs are treated differently
- Cashing out to pay credit cards usually costs you money you could have kept
At a glance
401(k)s and employer pensions
401(k)s and employer pensions are the safest assets most people own in bankruptcy. Plans covered by ERISA, the federal retirement law, have rules that stop the money from being taken by creditors. The U.S. Supreme Court held in Patterson v. Shumate (1992) that these plans are not part of the bankruptcy estate at all.
That means a Chapter 7 trustee cannot reach the money, no matter how much is in the account. The same is true for most 403(b) plans and many other employer plans. Government pensions are also protected. We confirm the type of plan from your statement.
Money your employer withheld from your pay for plan contributions is also kept out of the estate under federal law, even if it has not reached the plan yet.
IRAs, Roth IRAs and self-employed plans
IRAs are protected in bankruptcy, with some limits. Federal law lets you protect retirement funds held in tax-exempt accounts, even when you use California's exemptions.
- Traditional and Roth IRAs are protected up to a federal dollar cap that adjusts every three years. The cap is very high, far more than most people ever hold in an IRA, so most people are fully covered.
- Rollover IRAs funded from a 401(k) or other employer plan do not count toward that cap. Neither do SEP and SIMPLE IRAs.
- Inherited IRAs are different. In Clark v. Rameker (2014), the Supreme Court held they are not "retirement funds" under the federal exemption. California law may still protect part of one. We review these case by case.
California adds its own protection. Under System 1, private retirement plans are generally exempt, while IRAs and self-employed plans are protected to the extent needed for your support and your family's support. Under System 2, retirement, pension and annuity payments are protected "to the extent reasonably necessary for the support of the debtor and any dependent" (CCP 703.140(b)(10)(E)).
Because federal protection applies under either system, retirement accounts rarely decide which system you choose. Compare the rest on our System 1 vs System 2 page.
What happens to a 401(k) loan
A 401(k) loan is money you borrowed from yourself. It is not discharged in bankruptcy, and your employer can keep taking repayments from your paycheck after you file.
In Chapter 13, federal law says 401(k) loan repayments are not counted as disposable income. That can lower what you must pay unsecured creditors through your Chapter 13 plan. Once the loan is paid off, the trustee may expect that money to go into the plan.
In Chapter 7, the loan payment shows up in your budget. How it is treated in the means test is a detail we work through with your pay stubs.
Do not raid retirement to pay debts
Do not cash out a protected retirement account to pay credit cards, medical bills or other unsecured debt. Here is why:
- The money in the plan is protected. The debts you pay with it could likely be wiped out in bankruptcy.
- An early withdrawal often triggers income tax and a penalty. You lose part of the money before a creditor sees any of it.
- Once withdrawn, the money is cash. Cash in your bank account on filing day may not be protected the same way.
- Payments to some creditors, or to family, in the months before filing can be undone by the trustee.
If you already withdrew money, tell us. We look at where it is now and what exemption might still cover it. See wages, tax refunds and cash on filing day.
What to watch for
- Large contributions right before filing. Moving cash into a retirement account just before filing can be challenged.
- Not listing the account. Protected accounts must still be listed on your schedules.
- Assuming an inherited IRA is safe. It may need a different exemption, or none may apply.
- Mixing retirement and regular savings. A brokerage account is not a retirement account, even if you think of it that way.
What it costs
- Chapter 7: flat attorney fee from $1,200, plus the $338 court filing fee
- Chapter 13: attorney fee quoted in writing, and part of it can be paid through the plan
- Payment plans are available, and the first consultation is free
More on what you keep
- California bankruptcy exemptions: what you keep
- California Exemptions: System 1 vs System 2
- The California Homestead Exemption and How Yours Is Figured
- The California Motor Vehicle Exemption
- The Wildcard Exemption Under CCP 703.140(b)(5)
- Retirement Accounts, 401(k)s and Pensions in Bankruptcy
- The Tools of the Trade Exemption
- Household Goods, Jewelry and Personal Property
- Wages, Tax Refunds and Cash on Filing Day
Retirement account questions
Is my 401(k) safe in bankruptcy?
Yes, your 401(k) is almost always safe in bankruptcy. Plans covered by federal retirement law are generally not part of the bankruptcy estate, so the trustee cannot take the money.
Is my IRA protected in bankruptcy?
Yes, your IRA is protected in bankruptcy up to a high federal cap that covers most people in full. Rollover amounts from employer plans do not count toward the cap. Inherited IRAs follow different rules.
Can I keep repaying my 401(k) loan after filing?
Yes, you can usually keep repaying your 401(k) loan after filing, and your employer can keep withholding the payments. The loan is not discharged.
Should I cash out my 401(k) to avoid bankruptcy?
No, you usually should not cash out a 401(k) to avoid bankruptcy. The account is protected, and the withdrawal costs taxes and penalties. Talk with us first about whether bankruptcy makes sense. Our guide to what you keep in bankruptcy covers the other exemptions.
Free consultation
Keep your retirement where it is
Call (310) 362-9071 or send the form. Bring your latest retirement statements and we will confirm how each account is protected.
Law Offices of John Asuncion9454 Wilshire Blvd., Penthouse Floor
Beverly Hills, CA 90212
(310) 362-9071
Monday to Friday, 9 a.m. to 6 p.m.