Ask Kim
Bankruptcy Law Protects IRAs
Do you know how the new bankruptcy rules apply to IRAs or 529 accounts?
By Kimberly Lankford, Contributing Editor, Kiplinger's Personal Finance
May 16, 2005
I know that a new law changed many of the bankruptcy rules. Do you know how the new rules apply to IRAs or 529 accounts?
Even though the new law made it tougher to keep many assets, it made it easier to protect your IRA and a lot of money in your 529 account.
The law clarified that IRAs -- like 401(k)s -- can't be touched even if you file Chapter 7 bankruptcy. The new law caps the IRA protection at $1 million per person for money you've invested directly into the IRA, but the cap doesn't apply to money that was rolled over from 401(k)s or other pension plans.
The new law also clarifies the rules for 529s. You can keep an unlimited amount of money that you invested in a 529 two years ago or more, and can keep up to $5,000 that you invested more than one year but less than two years ago. Money invested in a 529 account within the past year is not considered an exempt asset, which means you may need to use it to pay creditors if you file Chapter 7.
Most of the law's provisions take effect on October 17. The biggest changes in the law include a means test for discharging debts under Chapter 7. If you earn more than the median income in your state (generally about $40,000 per year for a family of four), it's more likely that you'll need to file Chapter 13, where you pay back a larger portion of your debts over three to five years. The new bankruptcy law also made it much more difficult to file for bankruptcy -- requiring credit counseling and debtor education, and lengthening the period you have to wait before filing again.
For more information about the new bankruptcy law, see Nolo Press's bankruptcy page and the American Bankruptcy Institute's coverage of the new bankruptcy law.