Are both Roth IRAs and 403(b)/401(k) plans protected from bankruptcy?

Personal Finance October 22, 2012|Print

Yes. Employer-sponsored retirement savings plans, such as 401(k) plans, 403(b) plans, and 457 plans, are excluded from an individual's "bankruptcy estate" (i.e., the total amount of assets that are part of a bankruptcy filing). For the self-employed and small business employees, assets held in Keogh, SEP-IRA, and SIMPLE-IRA plans are also excluded from bankruptcy proceedings.

Even though retirement plan assets are shielded from bankruptcy, they may not be protected from other types of judgments such as civil lawsuits and federal tax liens imposed by the IRS.

Roth IRA (and traditional IRA) assets held in contributory IRAs (i.e., IRAs that are funded with annual contributions) are capped at an inflation-adjusted amount of $1 million—a high limit that exceeds the amount that most investors have accumulated in IRAs to date. Rollover IRAs (i.e., qualified plan assets that are rolled over into an IRA) are exempted beyond the $1 million limit. For this reason, investors should keep IRAs that are funded with rollover contributions separate from IRAs funded with annual contributions. If the two types of accounts are commingled, it will be difficult to identify which portion of the assets has unlimited protection and which portion is subject to the $1 million limit.

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