3653 / Are IRAs subject to attachment?
ERISA provides that benefits under “pension plans” must not be assigned or alienated.1 This provision has been construed as protecting pension benefits from claims of creditors. ERISA defines a “pension plan” as a plan established or maintained by an employer to provide retirement income to employees. An individual retirement plan generally is not maintained by an employer and, thus, is not protected under federal law by ERISA’s anti-alienation clause.2
Although qualified retirement plans, SEP IRAs, SIMPLE IRAs, and elective deferral Roths are excluded from bankruptcy (i.e. not part of the bankruptcy estate), the same is not true for traditional IRAs and Roth IRAs.3 Traditional IRAs and Roth IRAs, however, may be exempted (i.e. protected) from bankruptcy depending on the size of these accounts (see below).
A debtor can choose to exempt property from the bankruptcy estate using federal exemptions or state exemptions, but not both.4 Federal bankruptcy exemptions generally protect a debtor’s right to receive payments under a stock bonus, pension, profit-sharing, annuity or similar plan on account of illness, disability, age, or length of service under Section 522(d)(10)(E) of the federal Bankruptcy Code. The U.S. Supreme Court has ruled that assets in a traditional IRA are eligible for this exemption.5
Although bankruptcy is governed by federal law, Congress has given states the power to create their own exemptions and to opt out of the federal exemption system. Each state now has its own set of exemptions and many, but not all, have opted out of the federal system entirely. For a debtor living in a state that has opted out, only applicable state law exemptions may be used in a bankruptcy proceeding to exempt assets. It should be noted, however, that many states also extend protections to IRAs and Roth IRAs and exempt (fully or partially) these accounts from attachment by creditors – even in non-bankruptcy cases.
Editor’s Note: Note that inherited IRAs that are inherited by non-spouse beneficiaries are often not given the same bankruptcy protection.
Planning Point: When available, a debtor choosing between the available federal and state exemptions should examine all of his or her assets, not just the IRA provisions, to determine which method is more beneficial in bankruptcy.
The bankruptcy exemption for contributory (non-rollover) traditional and Roth IRAs is limited in the aggregate to $1 million (the amount is indexed every three years and the current limit (as adjusted April 1, 2025) is $1,711,975 (the amount was $1,512,350 from April 1, 2022 through April 1, 2025, and for 2019 through April 1, 2022, the amount was $1,362,800 per person, for 2016 through April 1, 2019, the amount was $1,283,025), unless the bankruptcy court determines that “the interests of justice” require otherwise.6 The exemption for IRA balances rolled over from other retirement accounts with an unlimited exemption is unlimited.
The exemption limit applies to the aggregate of all retirement accounts, without regard to rollover contributions, and does not apply separately to each account. Amounts in excess of the limit are subject to the claims of creditors.7
The Eighth Circuit has upheld a bankruptcy appellate panel decision, finding that an annuity purchased with funds rolled over from a taxpayer’s traditional IRA was exempt from the bankruptcy estate because the annuity complied with the IRC Section 408 requirements for qualified individual retirement annuities. This was held to be the case despite the fact that the taxpayer paid an initial lump sum for the annuity that exceeded the annual contribution limits under IRC Section 219(b). The court agreed with the taxpayer’s argument that the amounts rolled over from the IRA into the annuity did not constitute premium payments, so that the IRC Section 408(b) prohibitions against fixed premium amounts or premiums that exceed the Section 219 annual limits were not violated. As a result, under the Eighth Circuit’s logic, funds from a traditional IRA can be rolled over into a qualified individual retirement annuity without losing the bankruptcy exemption granted to IRA funds.8
With respect to self-directed IRAs, the 11th Circuit confirmed that a taxpayer was not entitled to creditor protection in bankruptcy with respect to a self-directed IRA that he used for impermissible purposes. In this case, the taxpayer withdrew IRA funds to purchase cars, real estate and other assets not specifically permitted by the IRA, which prohibited using the retirement funds for pre-retirement personal benefit. The issue in this case was not whether IRA funds were used for prohibited personal use, however, but whether the assets left within the IRA could be protected from creditors in bankruptcy. The court ruled that the creditors could access amounts left in the IRA, regardless of whether that IRA continued to be tax-exempt, because the taxpayer failed to properly maintain the IRA by withdrawing funds for prohibited reasons.9
Making excess IRA contributions is another scenario that can cause an IRA to lose its bankruptcy protection. A recent case, Stephanie Paula Farber v. Lynn E. Feldman, No. 2:22-cv-01817, involved a situation where a taxpayer rolled over amounts she inherited from her father's IRA ($41,000) into an individual retirement annuity in her own name. When she later declared bankruptcy, the bankruptcy trustee claimed that the transferred amount exceeded the annual contribution limit for the year in question, thus causing the IRA to lose its tax-exempt status. The judge agreed.
Planning Point: Although assets rolled over from non-Roth IRA retirement accounts, and future earnings on those assets, do not lose their unlimited exemption by virtue of a rollover, taxpayers with significant IRA balances are advised to keep their contributory and rollover IRA accounts segregated. Otherwise, to the extent that rollover IRA assets are commingled with contributory IRA assets, it may be difficult to calculate the value of the assets attributable to the rollover.
Outside the bankruptcy context, the U.S. Court of Appeals for the Seventh Circuit has ruled that because ERISA’s anti-alienation provisions do not apply to assets contained in IRAs, such assets may be seized under criminal forfeiture proceedings brought by the federal government.10 The Tenth Circuit Court of Appeals has held that an IRA trustee was not in breach of its fiduciary duty to an IRA account holder when the trustee responded to an IRS service of notice of levy for delinquent taxes owed by the account holder by turning over to the IRS assets held in the account.11
1. ERISA § 206(d)(1).
2. Patterson v. Shumate, 504 U.S. 753 (1992).
3. 11 U.S.C. §§ 541(b)(7), 541(c)(2).
4. 11 U.S.C. §§ 522(b)(1).
5. Rousey v. Jacoway, 544 U.S. 320 (2005).
6. 11 U.S.C. §§ 104 and 522(n).
7. 11 U.S.C. § 522(n).
8. Running v. Miller, 778 F.3d 711 (8th Cir. 2015).
9. Yerian v. Webber, 2019 WL 2610751 (11th Cir. 2019).
10. Infelise v. U.S., 159 F.3d 300 (7th Cir. 1998).
11. Kane v. Capital Guardian Trust Co., 145 F.3d 1218 (10th Cir. 1998).