Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), the first $1 million of IRA and Roth IRA funds are protected (or exempt) in bankruptcy. This amount is reviewed every three years and increased as needed. For example, the $1 million base amount increased to $1,171,650 in April 2010, and now is increased to $1,242,475.
A cardinal rule of asset protection planning is the more assets you have, the more you have to lose. And if you have accumulated savings in an IRA, then you should be aware of the asset protection allotted for your IRA.
As recently reported by the Slott Report, the IRA bankruptcy exemption has just increased. The article is titled “IRA Bankruptcy Exemption Amount Increases.” Background: the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) cleared the way and exempted the first $1 million of IRA funds (including Roth IRAs) in the event of bankruptcy.
Fortunately, this amount is subject to cost of living adjustments. Accordingly, the new number as of April 1, 2013, is $1,245,475. This is great news for most American savers, since the average IRA is less than $1 million. Still, it’s also a figure worth knowing for larger IRAs given the important function they serve in many retirement and/or estate plans.
Caveat: what is just as important as the exemption are the limitations to the exemption. The safety of the exemption is only afforded in the case of filed bankruptcy, and might be voided in certain instances even then, but other events like divorce may easily trigger a levy on the IRA.
The important lesson to remember is that there are existing IRA protections to be understood, but they need to be considered as part of a comprehensive asset protection strategy. Such a strategy will necessarily involve considerations of state law protections, asset titling and insurance coverage.
Be sure to engage competent legal counsel, as proper asset protection planning is not a do-it-yourself project.
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Reference: The Slott Report (April 9, 2013) “IRA Bankruptcy Exemption Amount Increases”