Can the Funds in an IRA Be Part of Your Bankruptcy Estate?

Can You Lose Individual Retirement Account Assets in a Bankruptcy?

Funds in an IRAWhen you file for protection under Chapter 7 of the bankruptcy laws, a “bankruptcy estate” will be created, into which certain assets of yours will be transferred. If those assets are not exempt under state or federal law, the bankruptcy trustee may choose to sell them to pay down some of your debts.

Under the revisions made to the bankruptcy laws more than a decade ago, individual retirement accounts are generally exempt from seizure and sale in a bankruptcy proceeding, up to a specific dollar amount. There are situations, though, where the trustee may have the legal right to access to IRA funds.

When You Use IRA Dollars to Pay for Day-to-Day Expenses

Here’s a mistake people often make with their IRA accounts. They choose to rollover an IRA— transfer the proceeds from one individual retirement account to another. After they’ve withdrawn the initial funds, they have 60 days to roll those funds into the new account without incurring tax consequences. If, during that 60 day period, funds are used to pay living expenses or immediate needs, the trustee may successfully argue that they are similar to savings or checking account funds and accessible to creditors.

The best way to avoid this potential problem—don’t roll over the funds until you know where they will go, and then make the rollover immediately. As an alternative, create a separate account for the rollover funds and don’t touch them until you roll them over.

When You Exceed the Contribution Ceiling on Retirement Funds

Under federal law, a debtor can protect more than $1.2 million in retirement funds. However, to the extent that the total contributions exceed the statutory amount allowed for exemption ($1,245,475 as of this article), they can be available to satisfy creditors.

Contact Heath, TX Bankruptcy Attorney Carrie Weir

I offer a free initial consultation to all potential bankruptcy clients. Contact my office by e-mail or call me at 972-772-3083 for a private meeting. With offices in Rockwall, Texas, I represent clients in Heath, Greenville, Lavon, Wylie, Mesquite and Rowlett.

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