Court Case Lerbakken v. Sieloff and Associates Sheds Light On Bankruptcy Protection for Solo 401k Plans and IRAs

Generally, individuals who file for bankruptcy protection may keep all of their qualified retirement plan assets (e.g., solo 4o1k plans)—and up to around $1.3 million in IRA assets.

As a result of court case Lerbakken v. Sieloff and Associates, IRA and 401k plan  (including solo 4o1k plans) assets captured through a divorce may not always be protected from bankruptcy creditors.  In this case, the court essentially ruled that retirement assets collected through a divorce do not always qualify for the bankruptcy exemption because they were obtained by the debtor through a divorce (i.e., the funds awarded to the debtor were contributions made by the former spouse not him). What may have resulted in  the court not ruling in favor of Mr. Lerbakken’s favor is that he did not transfer the funds to his own IRA or an eligible retirement plan such as a 401k including a solo 401k plan. Instead, he left them in the former’s spouse’s account, resulting in 8th Circuit panel ruling that the retirement funds  in this divorce were not exempt from taxation under the Internal Revenue Code which is similar to how inherited IRAs are treated by the court.  That is, inherited IRAs are not afforded bankruptcy protection because the IRA beneficiary is required to take IRA distributions, are not subject to the 10% early distribution penalty, and the beneficiary cannot contribute to the inherited IRA. See court case Clark v. Rameker for more on the how inherited IRAs may not receive bankruptcy protection from creditors.

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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