Federal Bankruptcy Exemption for IRAs: What You Need to Know

When individuals file for bankruptcy under federal law, such as under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) , certain retirement accounts receive protection from the bankruptcy estate. For Traditional and Roth IRAs, but not Inherited IRAs in many situations, federal law provides an exemption that shields a significant portion of IRA assets from creditors during the bankruptcy process.

Outside of bankruptcy, however, creditor protection works very differently. In those cases, whether a creditor can access a debtor’s IRA or Roth IRA generally depends on state law rather than federal law.

Under current law effective April 1, 2025, the maximum aggregate federal bankruptcy exemption for IRAs and Roth IRAs is approximately $1,711,975, with the amount adjusted for inflation every three years. This means that if you file for bankruptcy and the total value of your IRA, including contributions and earnings, falls below this threshold, those assets are typically protected from liquidation by the bankruptcy trustee to satisfy creditor claims.

Employer-sponsored retirement plans, such as 401(k) plans that meet ERISA requirements, receive even stronger protection. ERISA-qualified plans generally enjoy unlimited protection under federal bankruptcy law. The bankruptcy code exempts ERISA-defined retirement funds without imposing a dollar cap. This level of protection does not apply to IRAs.

In short, the federal bankruptcy exemption for IRAs is limited, currently capped at roughly $1.7 million, while ERISA-qualified plans such as 401(k)s are often fully protected.

How the Federal Exemption Works

When you file for Chapter 7 or Chapter 13 bankruptcy, your assets become part of the bankruptcy estate. Depending on the chapter filed, those assets may be subject to liquidation or structured repayment. Section 522 of the bankruptcy code allows debtors to exempt certain assets from the estate by using either federal exemptions or state exemptions, depending on where they live.

For IRAs, the federal exemption under Section 522(n) generally applies unless your state requires the use of state exemptions or provides stronger protection under its own laws.

Under the federal exemption:

• Traditional IRAs and Roth IRAs are protected up to the exemption cap, currently about $1.7 million.
• Amounts rolled over from employer-sponsored retirement plans into an IRA are not counted toward this cap, provided the rollover meets applicable requirements. These rollover amounts retain unlimited protection.
• Inherited IRAs, other than spousal inherited IRAs, are not treated as retirement funds for exemption purposes. The U.S. Supreme Court’s decision in Clark v. Rameker confirmed that inherited IRAs do not qualify for federal bankruptcy protection.

As a result, during bankruptcy, IRAs receive strong but not unlimited protection, assuming the exemption cap is not exceeded, and the account meets all qualifying requirements.

Outside of Bankruptcy: State Law Takes Over

If you are not filing for bankruptcy, the federal exemption does not automatically protect your IRA from creditors. Outside of bankruptcy, IRAs are not covered by ERISA’s anti-alienation rules. This means state law determines whether and to what extent creditors can reach IRA assets through lawsuits, judgments, liens, or garnishments.

Each state has its own statutes and court decisions governing creditor protection for IRAs, and the level of protection can vary significantly.

Examples of State Law Treatment

In Virginia, state law provides that IRAs are exempt from creditor process to the same extent permitted under federal bankruptcy law, as outlined in Virginia Code § 34-34 .

Florida offers some of the strongest IRA protections in the country. Under Florida Statute § 222.21(2)(a) , Traditional and Roth IRAs are fully exempt from creditor claims outside of bankruptcy, regardless of value.

Florida law protects:

• Traditional IRAs
• Roth IRAs
• Rollover IRAs from 401(k)s, 403(b)s, and similar plans
• SEP IRAs
• SIMPLE IRAs
• Inherited IRAs, which Florida explicitly protects and is uncommon among states

Georgia takes a more limited approach. Under Georgia Code § 44-13-100 , IRA distributions are exempt only to the extent reasonably necessary for the support of the debtor and the debtor’s dependents.

These examples highlight how dramatically IRA creditor protection can vary depending on state law. Some states offer broad protection, while others provide only limited safeguards.

Comparison: IRA vs. 401(k) Bankruptcy Exemption Rules

There are several key differences between IRAs and 401(k) plans when it comes to creditor protection.

Traditional and Roth IRAs are protected under federal bankruptcy law only up to approximately $1.7 million for the 2025 to 2028 period. Inherited IRAs are generally not exempt, and protection outside bankruptcy depends entirely on state law.

401(k) plans and other ERISA-qualified employer plans are generally protected without a dollar limit in bankruptcy, as long as the assets remain in the plan, and the plan maintains ERISA status. Outside bankruptcy, these plans also benefit from ERISA’s anti-alienation provisions, which shield them from most creditor claims.

While both types of accounts provide meaningful protection, 401(k) plans and other ERISA-qualified retirement plans offer broader and more consistent creditor protection than IRAs, both in bankruptcy and outside of it.

Why This Matters for Self-Directed Investors

If you hold a IRA or invest in alternative assets through an SDIRA, it is important to understand the limits of creditor protection.

• Bankruptcy protection for IRAs is strong but capped at approximately $1.7 million.
• If you live in a state that has opted out of federal exemptions, your level of protection may differ.
• Outside bankruptcy, creditor protection depends entirely on state law.

For individuals seeking maximum creditor protection both in bankruptcy and outside of it, using an ERISA-qualified plan such as a 401(k) or Solo 401(k) may be a more effective strategy.

Conclusion

The federal bankruptcy exemption for IRAs provides a valuable shield for retirement assets when bankruptcy is filed, but that protection is not unlimited. The exemption is capped at $1,711,975 and adjusted for inflation every three years. Outside of bankruptcy, IRA protection depends entirely on state statutes, which vary widely across the country.

Compared to 401(k) plans and other ERISA-qualified retirement accounts, IRAs generally offer less comprehensive creditor protection. Understanding these distinctions is essential when structuring a retirement plan and an overall asset protection strategy.