Higher IRA Federal Bankruptcy IRA Protection Limit Became Effective on April 1
When you file for bankruptcy, you may worry about whether creditors can take money from your retirement accounts. Fortunately, federal bankruptcy law provides significant protection for IRA and Roth IRA assets.
For most people, the federal protection limit provides more than enough coverage. As of April 1, 2025, the federal bankruptcy protection limit for IRA assets increased from $1,512,350 to $1,711,975. This limit remains in effect through March 31, 2028.
The rules become more complicated for individuals with IRA balances above the federal limit or for those who live in states with additional protections. Understanding how federal and state laws work together can help you better understand your IRA's protection during bankruptcy.
How Much of Your IRA Is Protected in Bankruptcy?
Federal bankruptcy law protects IRA and Roth IRA assets up to a specific dollar limit. The limit adjusts every three years based on changes in the cost of living.
For the current period, the federal protection limit increased to $1,711,975 on April 1, 2025. The limit applies through March 31, 2028.
The limit generally applies to amounts that come from IRA contributions and the earnings generated by those contributions. However, the calculation does not include certain amounts that originated in employer-sponsored retirement plans.
This distinction can provide substantial additional protection for people who have rolled retirement assets from an employer plan into an IRA.
Rollover IRA Assets Receive Full Federal Protection
One important feature of the federal bankruptcy rules involves retirement funds that originated in employer-sponsored plans.
Rollover amounts from employer retirement plans such as 401(k)s receive full federal bankruptcy protection when they move into an IRA. SEP and SIMPLE IRA rollover amounts also receive this treatment under the rules discussed in the original source.
Because rollover assets do not count toward the $1,711,975 limit, someone with a large IRA balance may still have substantial protection beyond the federal dollar threshold.
For example, an IRA could contain both rollover funds from a former employer plan and contributions made directly to the IRA. The federal protection limit applies to the contribution-based IRA assets, while qualifying rollover amounts receive separate protection.
This distinction can become important when reviewing the makeup of a large IRA before bankruptcy.
What Happens If Your IRA Exceeds $1,711,975?
Most IRA owners will never reach the federal protection limit. IRA contributions only became available in 1975, which makes it unusual for someone to accumulate more than $1.7 million from direct IRA contributions and investment earnings alone.
However, some investors have accumulated exceptionally large IRA balances.
If your IRA contains more than the federal protection limit, you may have additional options depending on where you live. State law can provide additional bankruptcy protection that goes beyond the federal limit.
Some states protect IRA assets in bankruptcy without imposing a dollar cap. If you live in one of those states, your entire IRA may receive protection even if the balance exceeds $1,711,975.
State laws vary, so your state of residence can make an important difference.
State Laws May Provide Additional IRA Protection
Federal bankruptcy protection does not represent the only potential source of protection.
Some states have their own laws that protect IRA assets from bankruptcy creditors. In certain states, those laws can protect the entire IRA balance regardless of the account's size.
This means an individual with an IRA worth more than the federal protection limit may still have substantial or complete protection under state law.
However, state bankruptcy laws differ significantly. You should not assume that the rules in one state apply to another state.
If you have substantial retirement assets and concerns about creditor protection, reviewing your state's laws with a qualified attorney can help clarify your situation.
Anti-Garnishment Laws May Provide Another Layer of Protection
Another potential source of protection involves state anti-garnishment laws.
An anti-garnishment law can prevent creditors from reaching certain assets to satisfy a legal judgment. These laws generally address situations outside of bankruptcy, such as a lawsuit that results in damages owed to another party.
A 2022 federal appeals court case involving a Georgia resident illustrates how these laws can affect bankruptcy protection.
In Hoffman v. Signature Bank of Georgia, the Eleventh Circuit Court of Appeals considered whether Georgia's anti-garnishment protections could protect IRA assets during bankruptcy. Georgia law provided strong protection against garnishment of IRAs.
The court concluded that the state's non-bankruptcy anti-garnishment law protected the resident's IRA assets in bankruptcy, even when the assets exceeded the federal bankruptcy protection limit.
The decision applied within the Eleventh Circuit, which covers Alabama, Florida and Georgia.
This case demonstrates why state-specific laws can matter when evaluating IRA bankruptcy protection.
Why the Hoffman Decision Matters
The Hoffman decision does not mean that every IRA owner receives unlimited bankruptcy protection.
The ruling applies within the Eleventh Circuit and depends on the existence of a state anti-garnishment law that provides the necessary protection.
If you live in a state without a comparable anti-garnishment law, you cannot assume that the Hoffman decision provides the same protection.
The case does, however, illustrate the interaction between federal bankruptcy law and state creditor protection laws.
For individuals with large IRA balances, these distinctions can become especially important when evaluating the level of protection available in a particular state.
Federal Protection Still Covers Most IRA Owners
For most IRA owners, the federal protection limit should provide substantial coverage.
The current federal limit stands at $1,711,975 for the period from April 1, 2025, through March 31, 2028. Qualifying rollover assets from employer retirement plans receive separate protection and do not count toward this limit.
State laws may provide additional protection for individuals with larger IRA balances. However, the availability and extent of that protection depend on the laws of the state where the individual lives.
If you are concerned about IRA bankruptcy protection, creditor claims or the treatment of a large retirement account, consider reviewing your circumstances with both a financial professional and an attorney who understands bankruptcy and creditor protection laws.
FAQ: IRA Bankruptcy Protection
Are IRAs protected from bankruptcy creditors?
Yes. Federal bankruptcy law provides protection for IRA and Roth IRA assets, subject to applicable rules and the federal protection limit.
What is the IRA bankruptcy protection limit for 2025?
The federal protection limit increased to $1,711,975 on April 1, 2025, and remains in effect through March 31, 2028.
Are Roth IRAs protected in bankruptcy?
Yes. Roth IRA assets receive federal bankruptcy protection under the applicable IRA protection rules.
Are rollover IRA funds protected from bankruptcy creditors?
Qualifying rollover amounts from employer retirement plans receive full federal bankruptcy protection and do not count toward the $1,711,975 limit described above.
Can state law provide more IRA bankruptcy protection?
Yes. Some states provide additional protection for IRA assets, including protection that may extend beyond the federal dollar limit.
Does the $1,711,975 limit apply to every dollar in an IRA?
No. Qualifying rollover assets from employer retirement plans receive separate protection and do not count toward the federal limit.
What was the Hoffman v. Signature Bank of Georgia case about?
The case involved whether Georgia's anti-garnishment law could protect IRA assets during bankruptcy. The Eleventh Circuit ruled that the state law provided protection even when the IRA assets exceeded the federal bankruptcy protection limit.
Does the Hoffman decision apply in every state?
No. The decision applies within the Eleventh Circuit and relies on state anti-garnishment protections that may not exist in other states.
Should I review my IRA protection before filing bankruptcy?
Yes. Bankruptcy and creditor protection laws can involve both federal and state rules, so an attorney can help determine what protections apply to your specific circumstances.
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Christian Cordoba, founder of California Retirement Advisors, has been a member of Ed Slott's Master Elite IRA Advisor Group since 2007.