Bankruptcy and your retirement accounts

Bankruptcy is a form of personal financial protection. Now, more than ever, the protections of bankruptcy can fully blanket your retirement accounts.

While retirement investments classified as employer-backed 401(k)s and 403(b)s have long been under the protection from bankruptcy of the Employee Retirement Income Security Act of 1974, the BAPCPA , or Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 added IRA assets as a protected investment class as well. This should offer those considering bankruptcy an added sense of security that your financial future is still very much intact.

Depending on your place of residence, you will utilize either your state's protections or the federal protections under BAPCPA. The following discussion focuses on protections under North Carolina exemption law with a brief comparison to the federal protections. Overall, the North Carolina exemptions offer many of the same protections of federal law. However, because of the often subtle differences, it is very important that you disclose to your attorney any place you have resided in the past 3 years. The decision about which protections to utilize is a decision best left to an experienced bankruptcy attorney.

Under North Carolina law, Individual Retirement Accounts and Annuities, as well as IRC 408(c) trust accounts are fully protected in bankruptcy. The amounts which can be protected from creditors is unlimited. Under federal exemption law, the limit of protection from creditors is capped at $1 million. Apparently, research has shown that the majority of IRA accounts are below that benchmark. This is mainly due to the short lifespan of IRAs, which were not a typical retirement vehicle until that last 20 years and because of the relatively low annual contributions that are allowed. Currently, $5,000 is the maximum annual amount that can be contributed for a traditional IRA if you are below 50 years of age.

Under federal law, rollover IRAs are protected beyond the $1 million mark. For example, most people change jobs several times during a career and as a result, have an array of retirement accounts funded and created from different employers. It makes good investment sense to collect those varied accounts under a single IRA, which when conjoined, will return more money and if above $1 million, still be protected from bankruptcy.

Federal law also includes protection from Simplified Employee Plan (SEP) accounts and SIMPLE IRAs, or Savings Incentive Match Plan for Employees, as well as independent 401(k) and Keogh plans. This is especially good news because the 1974 plan did not include exemption for solo and Keogh accounts.

If you have been investing in a college plan for your children, there are some protections afforded to you as well. In North Carolina, section 529 college savings plans are protected with some stipulations: Contributions made more than 1 year prior to filing are fully protected up to $25,000.00. This $25,000.00 cap can also include contributions made in the year prior to bankruptcy, if the contributions are consistent with the debtor's past pattern of contributions. Under federal law, contributions made more than 2 years prior to filing are fully protected. Contributions made between 1 and 2 years prior to filing are protected up to $5,000.00. Federal law offers no protection for contributions made less than 1 year prior to filing.

When discussing bankruptcy options with your attorney, be sure to tell them about all of your retirement accounts and investments; don't assume anything. Also, state laws vary on these matters, so make doubly sure you disclose everything.

There are a number of ways to rebuild your credit history and financial confidence after filing bankruptcy. By holding on to your retirement accounts, you can feel confident that things will improve and that all of your long-term life plans, destinations and goals, are still every bit as attainable as they were before filing bankruptcy.