How safe are your retirement savings in a bankruptcy?

How safe are your retirement savings in a bankruptcy? Are they at risk if you roll over a 401(k) to an IRA?

In most cases, your 401(k) funds qualify for creditor protection under a federal law known as ERISA. ERISA contains a special clause that basically blocks your 401(k) money from the reach of most creditors.

Typically, the only people who can get a piece of your 401(k) money while it’s inside of its protective “ERISA shell” are the IRS and an ex-spouse as part of a divorce proceeding. Other than that, your 401(k) creditor protection is basically airtight.

So, does the protection in your 401(k) follow along in bankruptcy? And what happens if you move those ERISA-protected 401(k) funds to an IRA?

Although bankruptcy laws are generally determined by each individual state, a 2005 federal law provides your retirement account with strong bankruptcy protection, no matter what state you live in. Under that law, plan funds, including 401(k) funds, are given an unlimited exemption in bankruptcy proceedings. That means you can have any amount of money in your 401(k), and all of it could be protected in a bankruptcy proceeding.

If you roll that money over to your IRA, the unlimited protection in bankruptcy proceedings will generally still apply.

We hope you’ll never need this little piece of knowledge, but it’s nice to know what the rules are, just in case.

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