When we consider options for investing some of our income for the future, many of us look to traditional and Roth IRAs. Both offer protection against creditors but there are limits, of course. If you are new to investing, a traditional IRA (Individual Retirement Account) is a tax-deductible investment providing tax-deferred savings. If for example, you earned $50,000 and you paid $2,000 into an IRA, you will only pay income tax on $48,000 of income. So long as you do not withdraw any of the IRA funds until you are 59 ½ years old, you will not pay any tax penalties for early withdrawal, and you will only pay income tax on the money at your then tax rate. A Roth IRA acts differently and your savings are tax-exempt, not deferred. Following the first example, despite your $2,000 contribution to the Roth IRA, will pay income tax on $50,000. However, when you are 59 ½ years old and your Roth IRA has been open for at least five taxable years, you can withdraw the money without being taxed at all.
The reason many people like using IRAs to save for the future is the “don’t touch it or you’ll regret it” factor. Of course, there are times people take loans against their IRA and that is certainly an option if the event arises. What many people don’t think about when they sign up for an IRA is that they are largely untouchable in bankruptcies and there is little a creditor can do to seize those funds.
The 2005 bankruptcy code overhaul added protections making IRAs safer and more creditor-proof. The limit of safe funds is $1,245,457[i]. In addition, self-employed IRAs and workplace 401(K) amounts rolled over into IRAs are not subject to the $1.2M limit to protect against creditors.
Chicago Bankruptcy Attorney Joseph Wrobel offers his comments on IRAs and bankruptcy:
“For almost every single consumer that files a bankruptcy, hard-earned money sitting in a retirement fund [401(k), pension plan, IRA, etc.] is exempt and will not be taken by a Chapter 7 Trustee, nor does not it need to be evaluated as an asset in a Chapter 13[ii]. The Federal Bankruptcy Code and the state statutes that provide for retirement money to be exempt set forth standards that the retirement fund must meet in order for the fund to qualify as exempt. However, it is a truly rare event for a prospective debtor to find him or herself in a situation where his or her retirement money is not exempt.” Attorney Joseph Wrobel.
Commenting on the Chicago Tribune article that notes exceptions to IRA safeguards, he further states, “As with all rules, there are exceptions and that is the gist of this article. One of the exceptions deals with the monetary limit for a Roth IRA. The likelihood that someone with such a large Roth IRA can even qualify for a Chapter 7 is quite small. Generally, with such a large IRA, that person will also have a large income and other assets that would prevent the filing of a Chapter 7.” Attorney Joseph Wrobel.
Are there other exceptions to the bulletproof IRA? Yes, and many are unusual.
The Chicago Tribune article also reported a Wisconsin case involving inheritance, which Attorney Joseph Wrobel points out, “The other exception being an inherited IRA, again, a quite unusual situation.” In Chicago, this past April, the 7th U.S. Circuit Court of Appeals, “essentially said an inherited IRA ceases to become retirement money when it passes to an heir, and the money is available to creditors[iii].
The value of working with a veteran bankruptcy attorney comes from the amount of experiences that attorney has endured and the strange fact patterns that could trigger a variety of events. If you are a consumer considering bankruptcy and you have cash or invested assets, in an IRA, for example, do not worry about losing it. But make certain you hire an experienced bankruptcy attorney.
If you want to learn more about bankruptcy proceedings, contact an attorney at Joseph Wrobel, Ltd. The firm’s website contains informative videos about financial issues as well as bankruptcy protection for families who want a fresh start. To keep in touch and read about consumer finance news and stories you can Like the firm’s Facebook page and Follow Joseph Wrobel. Ltd. on Twitter. If you need legal assistance, please call Joseph Wrobel, Ltd. by dialing (312) 781-0996 to talk to an attorney.
[i] Chicago Tribune: Roth IRAs not always protected from creditors. By Janet Kidd Steward, Sept. 20, 2013
[ii] One of the factors that determine the amount of a Chapter 13 payment plan is the value of the Debtor’s assets.
[iii] See Chicago Tribune article cited above.