Charlotte Bankruptcy Lawyer Bryan W. Stone of Arnold & Smith, PLLC answers the question “Are my 401k and IRA protected in bankruptcy?”
A recent article in the Detroit News discussed the case of an attorney who had to advise a client not to file for bankruptcy despite a massive $400,000 mountain of debt. The reason? Because the man had recently inherited an IRA from his deceased mother. According to a recent U.S. Supreme Court case, the money contained in the IRA would not be protected during the bankruptcy process and would instead be forfeited to pay off creditors. Given the certain loss of the money, the man decided to avoid filing and continue struggling under an impossible debt burden.
The issue of how retirement accounts are treated in a bankruptcy has received increased attention in recent years. The Supreme Court in 2014, ruled on the issue (in Clark v. Rameker) and decided that the typical rules which protect IRAs and 401(k)s in the event of bankruptcy should not extend to protect inherited retirement accounts. The Court concluded that inherited IRAs are not protected retirement funds because holders cannot invest new money into the accounts and can withdraw the money at any time without penalty.
This issue is of growing importance because of the upcoming transfer of wealth between parents from the World War II generation and their children and grandchildren. Experts believe that between now and 2016, more than $59 trillion in wealth will be transferred by some 94 million estates, the largest wealth transfer in history. As this transfer begins picking up speed, more and more people may find themselves in the situation of having to choose whether to liquidate their inheritance or continue to struggle with debt.
The good news is that when it comes to personally owned retirement accounts, bankruptcy filers are protected. Currently, the law says that individual retirement accounts are protected up to a $1.2 million cap. Additionally, the full amount of a participant-owned 401(k) is fully protected. Also, pension plans are protected, but for a different reason than IRAs or 401(k)s. This is because pension plans are owned by the company and thus are not considered a personal asset.
For those located in North Carolina (and 6 other states) there is even more good news: inherited IRAs in the state will receive the same protection as personally owned accounts. That’s because North Carolina’s legislature passed a law in 2013 that protected inherited IRAs from state bankruptcy claims. Currently, only 7 states, including North Carolina, have such protections. The others are Arizona, Alaska, Missouri, Florida, Texas and Ohio.
The hope is that as time goes on and as the wealth transfers happen more frequently, other states take similar steps to shield inherited money from creditors. For now though, those who need to file bankruptcy will have to weigh the benefits of freedom from debts against the costs of giving up a valuable inheritance.
If you find yourself needing the services of a Charlotte, North Carolina bankruptcy attorney, please call the skilled lawyers at Arnold & Smith, PLLC find additional resources here. As professionals who are experienced at handling all kinds of bankruptcy matters, our attorneys will provide you with the best advice for your particular situation.
About the Author
Kyle Frost joined Arnold & Smith, PLLC in 2013 where he focuses his practice on all aspects of civil litigation and bankruptcy, including: Chapter 7, Chapter 11, Chapter 13, home loan modifications and landlord-tenant issues.
Born and raised in upstate New York, Mr. Frost attended the University at Albany on a Presidential Scholarship, graduating magna cum laude with a double major in Political Science and Sociology. He went on to attended Wake Forest University School of Law in Winston Salem, North Carolina.
Following college, Mr. Frost spent over a year teaching English in South Korea. He worked in a private school in Seoul developing curriculum, English programs, and educating both children and adults that were interested in learning a new language.
In his spare time, Mr. Frost enjoys homebrewing, fishing, and travelling.
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