Are You Worried About Your IRA in Bankruptcy?

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Building up your retirement fund has likely been an important goal for you almost as long as you have had a job. You understand the importance of having those funds tucked away for the years that you will no longer have to work. However, you now face a difficult financial situation that may lead to you file to bankruptcy.

Hopefully, you already know that taking money out of your retirement account to cover outstanding debts is not the best idea because penalty fees could make your financial situation worse in the long run. Still, you may worry that filing for bankruptcy could result in you losing those funds entirely.

Protections for your IRA

Luckily, you do not have to hold such worry. In 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act went into effect, and among its many benefits, it provides federal protections for IRAs when individuals file for bankruptcy. Before this act, state laws determined whether bankruptcy would affect an IRA even though employment-based retirement accounts already had federal protections.

Is there a catch?

A slight skepticism of such protection is understandable, and it is important to have all the necessary information regarding what protections the BAPCPA provides. For traditional IRAs and Roth IRAs, account funds are protected up to $1,362,800. If you have a SEP IRA, SIMPLE IRA or rollover IRA, your account is protected no matter the value amount. It is important to note that you must have executed a rollover IRA effectively for it to have the full protections of the BAPCPA.

The BAPCPA does account for inflation, which is why the current protection amount is over $1.3 million. When the act went into effect in 2005, the protection amount was $1 million. Inflation adjustments take place every three years, and the next adjustment is expected to take place in 2022.

Other concerns

Now that you know that your IRA is likely protected from creditors during bankruptcy, you may still have some concerns about following this debt-relief route. Hesitation is understandable because filing for bankruptcy is a significant financial step. Obtaining as much information as possible about your options may help you better determine whether this method could help you address your financial burdens. You may also find it useful to speak with a New Jersey attorney about your specific circumstances.