Bankruptcy exemptions vary from state to state, but everyone gets an exemption of ~$1.75 M for money in an IRA. It’s part of the Bankruptcy Code (section 522(n)) that applies to all filers, wherever they live.
The exemption covers both classic, before-tax IRA’s and Roth IRA’s that are funded with after-tax dollars. Roll-overs into an IRA are covered, too.
The only significant limitation is that the IRA was funded with contributions that were within the IRC limitation for the year in which they were made. You can’t dump tens of thousands of dollars into an IRA (unless it’s a rollover) and expect to shelter an anomolous contribution.
The IRA in Bankruptcy
The universal exemption for IRA’s was one of the only good things to come from bankruptcy “reform” in 2005. Up to that point, debtors had to look to state law to see what exemptions were available. Federal exemptions, if available in a state, were limited to an “amount necessary for support”. That’s hardly precise.
But the new exemption is absolutely consistent with the legal protections for other formal retirement savings. Retirement arrangements like 401(k)’s and pension plans are not even “property of the estate” in bankruptcy; they simply are excluded from the nest of assets potentially available to pay creditors.
The cynical part of me wonders just whom Congress had in mind with a million dollar plus exemption when the rest of the “reform” act was so hostile to everyday folks. But I’ll take a good thing when it comes round.
Maximizing exemptions
Retirement savings are my favorite use when a client planning for bankruptcy has more cash than can be otherwise exempted in a bankruptcy case.
Courts generally accept transfers of assets from one, non-exempt form to an exempt form. The public policy behind exemptions as preserving the assets necessary for basic living overrides the laws against transfers to hinder creditors.
Note too that the protected value in an IRA is adjusted every three years for inflation. In 2025, the exemption is $1,711,975.
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