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Certain retirement savings entitled to bankruptcy protection

On Behalf of | Nov 17, 2014 | Chapter 7 |

The decision to file for bankruptcy is never an easy one to make. There are a number of considerations that individuals and families in Maryland must work through before making the decision that seeking bankruptcy protection is the right choice. Often, the impact that such a move might have on existing retirement savings is a serious concern, and a great deal of misinformation exists surrounding the topic.

Generally, funds set aside for retirement within an IRA are exempt from inclusion within one’s bankruptcy estate. That means that those savings cannot be used to pay back creditors or reduce one’s overall level of debt. However, there can be special circumstances that could place those funds at risk.

For example, if an individual were to withdraw funds from an IRA and then deposit those funds within a personal or business bank account, those funds could lose the umbrella of protection that they enjoyed while still within the IRA. This set of circumstances recently came before a bankruptcy court, when a couple withdrew nearly $40,000 from an IRA and placed it within their business account. The money was used to pay for personal and business expenses, and when the couple filed for bankruptcy they listed the remaining funds as an exemption. The bankruptcy trustee disagreed, and thus the matter went to court.

In this case, the judge ruled that those funds were still eligible for bankruptcy protection, despite the fact that they were not rolled into another retirement account and were used for business expenses. In making this ruling, the court used a blend of both state and federal law, which was due to the fact that the state in question had previously opted out of the federal bankruptcy structure. It is important for readers to keep in mind, however, that this outcome offers no guarantee that a similar ruling might be reached elsewhere.

When considering how to best protect retirement savings held within an IRA, the best course of action is to avoid withdrawing those funds whenever possible. Any funds taken out of an IRA should be immediately rolled into another retirement account with similar protections. If a Maryland resident has used funds from an existing IRA in a way similar to the one described here, it is important to have an attorney review the matter to determine the current level of bankruptcy protection possible.

Source:, “IRA funds protected in bankruptcy”, Ed Slott, Nov. 9, 2014

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