The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) provides IRAs with some amount of protection in bankruptcy, and it provides retirement accounts such as solo 401k plans with an unlimited amount of protection in bankruptcy under federal law. Bankruptcy laws, however, are generally determined at the state level. If a state wants to, it can use the federal bankruptcy exemptions provided by BAPCPA. Alternatively, states can opt out of the federal regime and use their own bankruptcy exemptions. Some states even allow debtors to choose between the federal exemptions and the ones provided by state law. 401k retirement accounts such as solo 401k plans, however, are unique, though, because under BAPCPA, even if a state opts out of the federal bankruptcy exemption regime, it must still allow debtors to exempt their solo 401k retirement assets under BAPCPA.
IRAs are typically exempt from the bankruptcy estate. A bankruptcy exemption means the IRA is not part of the property that’s included in the bankruptcy estate and thus can’t be used to pay creditors. BAPCPA established an inflation-adjusted bankruptcy exemption of $1,000,000 for IRAs and Roth IRAs. That amount is currently $1,245,475. Company retirement plan funds, including Solo 401k plans, SEP and SIMPLE IRAs, are completely protected in bankruptcy. Further, if a company solo 401k plan funds are rolled over to an IRA, they are still fully protected in bankruptcy in an unlimited amount.
BAPCPA also includes a provision that protects solo 401k retirement funds in transit from one plan or IRA to another. For example, if funds are withdrawn from a solo 401k I, the law protects these funds while they are out of the solo 401k in transit to the new IRA account.
