Bankruptcy Protection for IRAs, IRA LLC

IRA funds (Traditional and Roth) are partially protected in bankruptcy–currently, the cap is $1,362,800 and this amount is adjusted for inflation every three years and is based on the Consumer Price Index (CPI). The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 provides protection for IRA assets.

Quick Fact 1: SEP, SIMPLE IRA, and qualified plans such as the solo 401k plan for the self-employed receive full bankruptcy protection under the Bankruptcy Code so are not subject to the above cap.

Quick Fact 2: Funds that were rolled over / transferred to IRAs from employer sponsored retirement plans such as 401k plans, 457b, TSP and 403b, as well as SEP an SIMPLE IRAs, for example, do not count against the $1,362,800 cap. 

EXAMPLE: 

John has an IRA that was invested in a single member LLC (checkbook IRA) where his IRA is the sole member. The IRA LLC is valued at $1,000,000 so it is fully protected in bankruptcy.  He also has a former employer 401k plan value at $500,000 that he then transfers /rolls over to his self-directed IRA and subsequently invests it in his current IRA owned LLC.  Even though the $500,000 transfer from the former employer 401k pushed the IRA value past the $1,362,800 bankruptcy protection cap,  the $500,000 is fully protected in bankruptcy and the $1,000,000 IRA balance is also separately protected from bankruptcy creditors because it is below the  $1,362,800 threshold. 

Final Compliance Note: Inherited IRAs (beneficiary IRAs) are not protected in bankruptcy. This was confirmed when the U.S. Supreme Court ruled unanimously on June 12, 2014 in Clark v. Rameker.  The court’s reasoning was that beneficiary IRA funds can be distributed at anytime regardless of age.

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About Mark Nolan

Each day I speak with energetic entrepreneurs looking to take the plunge into a new venture and small business owners eager to take control of their retirement savings. I am passionate about helping others find their financial independence. Having worked for over 20 years with some of the top retirement account custodian and insurance companies I have a deep and extensive knowledge of the complexities of self-directed 401ks and IRAs as well as retirement plan regulations. Learn more about Mark Nolan and My Solo 401k Financial >>

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