Protecting Retirement Assets: A Bankruptcy Law Professor’s Analysis of §522 Exemptions for IRAs and 401(k)s
If you are considering filing for bankruptcy and have an Individual Retirement Arrangement (IRA) or 401(k) plan, you are right to be concerned. While these assets are generally well-protected, common pitfalls such as improper planning or simple mistakes can expose them to the Bankruptcy Trustee.
Keep reading to understand how the federal bankruptcy statute applies and how timing can determine whether your funds are protected.
By Alexander Hernandez, J.D., Professor, and Author of Consumer Bankruptcy Law (Routledge).
Updated on October 28, 2025.
Bankruptcy Exemptions: The Foundation of Asset Protection
If you’re filing for bankruptcy, knowing the exemptions available in your state is essential. These exemptions protect certain assets from being liquidated by the Chapter 7 Trustee to pay your creditors.
Whether your state uses its own or the federal exemptions, the protection provided is categorized by asset type. For example, the homestead exemption protects equity in your home, while motor vehicle exemptions protect equity in your car.
By knowing the value of your assets and the exemption amounts available, you will know to what extent your property is protected.
Retirement Assets Under the Bankruptcy Code
Most retirement accounts are well-protected, but the laws that protect them vary depending on the type of account. It’s important to understand these differences.
401(k)s and Employer-Sponsored Plans
For most employer-sponsored plans (such as 401(k)s and pensions), the protection is absolute because the assets are excluded from the bankruptcy estate entirely. Note that being excluded from the bankruptcy estate does not mean excluded from the bankruptcy petition. Your 401(k), like all other assets, must be disclosed.
IRAs (Traditional & Roth): The Exemption Cap
Individual Retirement Arrangements (IRAs) are also protected by the exemption under the Bankruptcy Code. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) solidified protection for IRAs under 11 U.S.C. §522(b)(3)(C). This section allows debtors to exempt funds up to a statutory limit, which is adjusted for inflation every three years:
Current IRA Exemption Limit: The maximum aggregate exemption amount for Traditional and Roth IRAs is $1,711,975 (effective April 1, 2025, and subject to future adjustments).
Professor’s Note: This cap does not apply to funds that were previously rolled over from an employer-sponsored plan (like a 401(k)) into an IRA. Those rollover funds retain their unlimited protection.
The Critical Mistake: When Exempt Funds Become Non-Exempt
A common and costly error debtors make is transferring funds from a protected account like an IRA or 401(k), into a non-exempt account, such as a regular checking or savings account. Depending on your state’s exemptions, those funds may be non-exempt.
Another common issue arises when debtors, worried that creditors might freeze their protected accounts, withdraw all the funds. This can complicate the bankruptcy process if the amount withdrawn is significant; the trustee may treat it as still part of the debtor’s assets and demand that it be returned to the bankruptcy estate.
Expert Practice: The “Payday” Trap and the Date-of-Filing Rule
The single most important principle in asset protection for a debtor is the date of filing. The date of filing is what creates the bankruptcy estate (§541) and the application of exemptions (§522) is fixed on this day.
If funds were in your checking account when the bankruptcy petition was filed, but were intended to pay your mortgage or other household expenses just a few days later, they may be non-exempt and belong to the bankruptcy estate.
This creates the classic “payday trap” for many filers:
As a practicing bankruptcy lawyer and professor, I emphasize timing with every client. If a client receives a paycheck on a Friday, and the petition is filed the same day, that cash is treated as non-exempt on the petition date, even if it is earmarked for a mortgage payment due Monday.
In these scenarios, I ensure adequate exemptions protect the funds, or I strategically delay filing for a few days to allow the funds to be used for legitimate household expenses, thereby zeroing out the non-exempt cash balance before the petition date.
Unfortunately, if a client fails to inform their attorney that they recently transferred a substantial amount from an exempt retirement account to their checking account, the risk of those funds being deemed non-exempt is high.
Therefore, when you consult with a bankruptcy lawyer, you must be 100% transparent. Inform them of any intent to withdraw funds from your retirement account or 401(k), or disclose all details regarding funds already withdrawn, including the amount, date, and use. Your full disclosure is the best insurance policy for protecting your retirement assets.
Professor Hernandez is an attorney specializing in consumer finance and debt relief. He is the published author of Consumer Bankruptcy Law (Routledge Publishing) and teaches law and finance courses in both English and Spanish for an international university.
Colleges and universities can purchase my bankruptcy law textbook directly from Routledge Publishing. Paralegals and students who are buying single copies can do so via Amazon Books. To access my YouTube channel, click this link. You can also listen to my podcast on Spotify.
You can learn more about filing for bankruptcy and the bankruptcy petition via this link. Information on the bankruptcy court system, contact information for trustees, and your state’s exemptions can be found here. The federal bankruptcy exemptions are listed here. The latest version of the 341 Meeting of the Creditors can be found here.
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Please note that the information on this site does not constitute legal advice and should be considered for informational purposes only.
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