Bankruptcy and Pensions: 401(k)s, IRAs, and ERISA Limits

Most retirement savings survive bankruptcy, but how well they survive depends entirely on the type of account. When it comes to bankruptcy and retirement accounts, employer-sponsored plans covered by ERISA — 401(k)s, traditional pensions, 403(b)s — are shielded in full with no dollar limit. Traditional and Roth IRAs are protected up to $1,711,975 for cases filed between April 1, 2025, and April 1, 2028. Inherited IRAs, non-qualified deferred compensation, and non-governmental 457(b) balances get little or no protection. The chapter you file under and the state you live in then shape what happens to anything left exposed.

401(k)s, Pensions, and Other ERISA Plans

Plans governed by the Employee Retirement Income Security Act of 1974 get the strongest protection the bankruptcy code allows. That category includes 401(k)s, 403(b)s, traditional defined benefit pensions, profit-sharing plans, money purchase plans, and stock bonus plans. ERISA requires each of these plans to include an anti-alienation provision that blocks creditors from reaching a participant’s benefits.¹

Federal bankruptcy law honors that restriction. If a trust limits the transfer of your beneficial interest and that limit is enforceable outside bankruptcy, it stays enforceable inside bankruptcy too.² The Supreme Court confirmed the point in Patterson v. Shumate (1992), holding that an interest in an ERISA-qualified plan is not property of the bankruptcy estate at all.³

There is no dollar limit. Contributions, employer matching, and every dollar of investment growth are covered. The protection applies whether you choose the federal or state exemption system, and it applies regardless of the account balance. A Solo 401(k) or single-participant defined benefit plan run by a sole proprietor still qualifies, as long as the plan documents are maintained properly and the plan meets the tax code’s qualification requirements.

Government Plans and the 457(b) Split

Not every workplace retirement plan is an ERISA plan. Government plans and church plans sit outside ERISA, so they can’t rely on ERISA’s anti-alienation clause. They still get bankruptcy protection through a different route: the federal exemption at 11 U.S.C. § 522(d)(12) specifically covers retirement funds in accounts qualifying under Internal Revenue Code sections 401, 403, 414, and 457, among others.⁴

Governmental 457(b) plans, offered by state and local governments, hold assets in trust for employees and are generally well protected in a participant’s bankruptcy.

Non-governmental 457(b) plans work very differently. If you participate in a 457(b) plan through a tax-exempt hospital, university, or similar employer, the plan assets must legally remain the employer’s property and stay available to the employer’s general creditors.⁵ That “unfunded” requirement exists for tax reasons, but it creates a real hazard. Your personal bankruptcy doesn’t expose the money to your creditors, because it isn’t legally yours yet. If your employer files for bankruptcy, though, those balances can be seized by the employer’s creditors.

Traditional and Roth IRAs

IRAs work on a different mechanism than employer plans. When you file, your IRAs become part of the bankruptcy estate. You then claim an exemption to pull them back out, and that exemption is capped.

Under the federal exemption system, the cap is $1,711,975 in the aggregate across all traditional and Roth IRAs. It applies to cases filed between April 1, 2025, and April 1, 2028, and adjusts for inflation every three years.⁴ For most filers, that ceiling is more than enough. For someone who has built a large IRA balance over decades, the amount above the cap is exposed in a Chapter 7 case.

Rollovers From a 401(k) Aren’t Capped

The dollar cap covers money accumulated through regular annual contributions and their earnings. Funds rolled over from an ERISA-qualified employer plan keep their unlimited protection even after landing in an IRA. The bankruptcy code says directly that direct transfers and eligible rollover distributions from a qualified plan don’t lose their exempt status.⁴

Documentation carries the day here. If your IRA holds both rollover dollars and annual contributions, you need clean records showing which is which. A separate rollover IRA that you never mixed with contributions is the cleanest proof. If the money is commingled, expect to produce account statements and transfer records back to the original rollover to establish the protected portion. Trustees and creditors do challenge murky records.

SEP and SIMPLE IRAs

SEP and SIMPLE IRAs sit between traditional IRAs and employer plans. They’re established under different Internal Revenue Code sections — 408(k) and 408(p) — and because they involve employer contributions, they often get broader protection than a regular IRA. The federal exemption statute covers accounts qualifying under section 408 without distinguishing between subtypes, while the dollar cap in section 522(n) references only individual retirement accounts under 408(a) and Roth IRAs under 408A. Many courts read this to mean SEP and SIMPLE IRA balances aren’t subject to the cap. If you have a large SEP or SIMPLE IRA, that reading is worth confirming with a bankruptcy attorney in your jurisdiction.

Inherited IRAs Are Not Protected

An IRA you inherited from a parent, sibling, or other non-spouse doesn’t carry the same protection as an IRA you funded yourself. In Clark v. Rameker (2014), the Supreme Court unanimously held that inherited IRAs are not “retirement funds” under the bankruptcy code and can’t be exempted from the estate.⁶

The reasoning was that an inherited IRA doesn’t behave like retirement savings. You can’t add new contributions. You must take distributions regardless of your age. And you can withdraw the entire balance whenever you want without an early withdrawal penalty. Without those retirement-savings features, the account doesn’t qualify for the retirement fund exemption.

Surviving spouses are the exception. A spouse can roll an inherited IRA into their own IRA, at which point it becomes their own account and gets normal protection. For a non-spouse beneficiary, the full inherited balance is exposed to creditors in bankruptcy. A handful of states offer separate protections for inherited IRAs under state exemption schemes, but federal law provides none.

How IRA Protection Can Fail

Even an IRA you built yourself can lose its shield if you break the tax rules that govern it.

Prohibited Transactions

The Internal Revenue Code lists transactions an IRA owner cannot engage in with the account: borrowing from it, using it as loan collateral, selling property to it, or buying property from it. A prohibited transaction disqualifies the account as of the first day of that tax year. The entire balance is treated as if it were distributed to you on that date, triggering income taxes and possibly an early withdrawal penalty.⁷

Once disqualified, the account is no longer an IRA for bankruptcy purposes either. It’s a taxable investment account with no retirement exemption available. Self-directed IRAs invested in real estate or private businesses are where this trap gets sprung most often, because the line between allowable investment and prohibited self-dealing can be blurry.

Contributions Right Before Filing

Contributions made shortly before filing draw extra scrutiny. A trustee can challenge recent contributions as fraudulent transfers if the primary intent was to shelter money from creditors rather than save for retirement. Regular, steady contributions made in the ordinary course are generally safe, even close to a filing date. A sudden, outsized contribution right before filing is what raises the alarm. The trustee has to prove fraudulent intent, but the timing often speaks for itself.

Federal vs. State Exemptions

The federal exemption system is one option, not the only one, and it isn’t available everywhere. Federal law lets states opt out of the federal exemptions and require residents to use the state’s own scheme.⁴ A majority of states have opted out. If you live in one of them, you must use the state exemptions for all of your assets, including retirement accounts.

Where the choice is available, compare carefully. The federal system caps IRA protection at $1,711,975. Many states offer unlimited IRA exemptions, which is better if you hold a large balance. But you have to apply one system to everything. A state with an unlimited IRA exemption but a weak homestead exemption may not be the better pick if you also own a home with meaningful equity.

For ERISA-qualified plans, the choice doesn’t matter. Those plans are excluded from the estate regardless of which system you use. The exemption selection only affects assets that need an affirmative exemption, such as IRAs, annuities, non-qualified plans, and other property.

The Domicile Lookback

Which state’s exemptions apply depends on where you’ve been living. If you’ve lived in the same state for the entire 730 days (about two years) before filing, that state’s exemptions govern. If you moved during that period, the applicable exemptions come from the state where you lived for the greater part of the 180-day window immediately before the 730-day lookback. In practice, that means looking back about 910 days from the filing date to fix your domicile during that earlier six-month stretch.⁴

Congress wrote the rule to keep people from moving to a friendlier exemption state right before filing. If you’ve relocated recently and are considering bankruptcy, the exemptions that apply may come from a state you no longer live in.

Non-Qualified Deferred Compensation

Non-qualified deferred compensation plans, executive stock option arrangements, and similar plans sit outside the framework that protects ERISA plans and IRAs. These plans don’t meet the tax code’s qualification requirements by design, often because they cover only select executives and exceed the contribution limits that apply to qualified plans.

The defining feature of a non-qualified plan is that it must stay unfunded. The assets stay on the employer’s books and remain available to the employer’s general creditors.⁸ They lack ERISA’s anti-alienation protection. When you file, the trustee looks at the plan documents to determine the value of your interest. If you have a vested, present right to payment, that interest becomes property of the estate.

Any protection has to come from a general state exemption rather than a retirement-specific one. Some states offer limited exemptions for annuity values or insurance products, which might cover a small non-qualified plan structured as an annuity. Those exemptions are usually inadequate for the large balances common in executive compensation. Debtors with substantial non-qualified plan wealth face a high risk of losing those assets in a Chapter 7 liquidation.

What Happens Under Chapter 7 vs. Chapter 13

The chapter you file under changes what happens to any retirement asset that isn’t fully protected.

Chapter 7

Chapter 7 is binary. If a retirement asset is excluded (ERISA plan) or fully exempt (an IRA within the cap), the trustee cannot touch it. If it isn’t protected — the portion of an IRA above $1,711,975, a non-qualified plan, or an inherited IRA — the trustee will seize and liquidate the non-exempt value and distribute the proceeds to unsecured creditors. You keep only what the exemption covers.

Chapter 13

Chapter 13 doesn’t liquidate. You propose a three-to-five-year repayment plan instead. Excluded and exempt retirement assets stay untouched, just as in Chapter 7. But non-exempt retirement funds still create an obligation through the “best interests of creditors” test: unsecured creditors must receive at least as much through your Chapter 13 plan as they would have received in a Chapter 7 liquidation. If you hold non-exempt retirement money, you’ll need to pay creditors an equivalent amount from future income over the life of the plan.

Chapter 13 does give retirement savers one meaningful advantage. Your regular, ongoing contributions to a qualifying retirement plan — amounts withheld from wages for ERISA plans, governmental 457 plans, or 403(b) plans — are excluded from the “disposable income” calculation that sets your monthly plan payment.² You can keep contributing during the repayment period without those dollars being redirected to creditors.

401(k) Loans During Bankruptcy

A loan from your own 401(k) sits in an odd category. It isn’t a debt to an outside creditor. It’s money you owe back to your own account. That means it isn’t dischargeable. Filing for bankruptcy doesn’t wipe out the obligation to repay yourself.

In a Chapter 7 case, you can continue voluntary loan repayments, but the loan balance can’t be used to reduce your assets for means test purposes. If you stop repaying, the outstanding balance is treated as a distribution from the plan. That triggers income tax on the unpaid amount and, if you’re under 59½, an additional 10% early withdrawal penalty.

In a Chapter 13 case, the bankruptcy code specifically says that payroll-deducted loan repayments to qualifying retirement plans aren’t blocked by the automatic stay that otherwise halts debt collection.² The repayment mechanism keeps running, which prevents the loan from converting into a taxable distribution mid-bankruptcy. The tradeoff is that those repayment dollars reduce your take-home pay, making it harder to fund your Chapter 13 plan.

The worst outcome is defaulting on a 401(k) loan around the time you file. You’d owe income taxes and possibly penalties on the deemed distribution, and unlike most debts, tax liability from a retirement plan distribution isn’t dischargeable in bankruptcy.

1
U.S. Department of Labor. Retirement Plans and ERISA FAQs
2
Office of the Law Revision Counsel. 11 USC 541 – Property of the Estate
3
Legal Information Institute. Patterson v Shumate, 504 US 753 (1992)
4
Office of the Law Revision Counsel. 11 USC 522 – Exemptions
5
Internal Revenue Service. Non-Governmental 457(b) Deferred Compensation Plans
6
Justia US Supreme Court. Clark v Rameker, 573 US 122 (2014)
7
Office of the Law Revision Counsel. 26 USC 408 – Individual Retirement Accounts
8
U.S. Department of Labor. ERISA Advisory Council Report – Examining Top Hat Plan Participation and Reporting