What happens to your retirement account in a Rhode Island bankruptcy?

Retirement accounts that are completely protected in a Rhode Island bankruptcy

ERISA qualified retirement accounts are completely protected up to any amount if you file for bankruptcy.  These types of accounts include:

• 401(k), 403(b), and 457(b) plans 
• tax-exempt organizations and government plans
• profit-sharing plans
• KEOGHs
• most company pensions, and
• Social Security funds

Retirement accounts that are protected up to a certain amount in a Rhode Island bankruptcy

Some retirement accounts are protected up to a maximum combined total of $1,362,800 and include:

• IRA’s
• Roth IRA’s
• SEP-IRA’s (for small business owners), and
• SIMPLE IRA’s (for self-employed individuals)

If you have more than this amount in your combined accounts, the court can take the excess to pay back your creditors.  Also, employee stock purchase plans and some inherited IRAs may not qualify for an exemption.

A retirement annuity might qualify for a federal exemption if it is designed to pay “on account of illness, disability, death, age, or length of service.” (Bankruptcy Code § 522(d)(10)(E)). It might also qualify for a state exemption, depending on the state where you reside.

Retirement accounts that are not protected in a Rhode Island bankruptcy

Cash and investment accounts will only be exempt if you have exemptions for money or a wildcard that you haven’t used on something else.  Both the Federal and certain State’s allow for both money and a wildcard.  This would include accounts like:

• insurance cash value
• traditional savings accounts
• money market or investment accounts
• stocks and bonds, and
• mutual funds

Rhode Island bankruptcy and retirement accounts

If you file for bankruptcy in Rhode Island you will be able to use either the federal bankruptcy exemptions or Rhode Island’s own state exemptions.  Rhode Island’s bankruptcy exemptions which are codified in RIGL §9-26-4 allow you to exempt tax-exempt retirement accounts (§9-26-4(11)) and ERISA-qualified retirement accounts (§9-26-4(12).

Withdrawing money from your retirement account before bankruptcy

The money in your protected retirement account will no longer be protected if it is withdrawn from the account.  For example, money withdrawn from your IRA and placed in your checking account won’t be exempt under federal law. It might be exempt under state law, but you’ll need to check the status with a local attorney. This rule isn’t limited to funds withdrawn before the bankruptcy case. Courts have held that retirement funds withdrawn months after the bankruptcy filing can lose protection, too.

Retirement account loans and bankruptcy

Often times people will borrow money from their retirement accounts like a 401(k) or 403(b) for home repairs or to pay off credit cards, medical bills or missed mortgage payments.  If you end up filing a bankruptcy case after borrowing from your retirement account you will still have to continue paying it back during your case and after if it isn’t paid off already.  The retirement account loan survives your bankruptcy case and you will also have to pay it back according to the rules of your retirement plan even if you are filing a Chapter 13 case with its own payment plan.    

In a Chapter 7 bankruptcy case your retirement loan payments are not considered mandatory contributions that you can use to pass the means test.  You still need to list them in Schedule I where you list your income or Schedule J where you list your expenses so that the case trustee knows that you are paying them back.  You want the case trustee to know that you are obligated to pay them back so that they will factor those payments into their “abuse” analysis when evaluating your case. 

You can however include your retirement loan payments in a Chapter 13 bankruptcy case just like other expenses like your mortgage and food.  You can deduct your retirement account loan payments on the means test in Chapter 13 bankruptcy which will affect how much you pay your other creditors.  But the court will typically require you to increase your monthly plan payment amount when the retirement loan is paid off in full during the course of your plan.