Is My 401k Account Exempt or at Risk in Bankruptcy?

In most cases, your 401k and other retirement accounts are protected in bankruptcy.

Updated by , Attorney · University of the Pacific McGeorge School of Law

In most cases, you can protect funds in a 401k and other tax-exempt retirement accounts from your creditors in bankruptcy. Read on to learn more about why your 401k account is likely safe if you file for Chapter 7 or Chapter 13 bankruptcy.

Once you understand your 401k options, find out how to protect other property in bankruptcy using bankruptcy exemptions. You'll find more information about filing for bankruptcy as a business debtor in Small Business Bankruptcy.

Some Retirement Accounts and 401ks Aren't Included in Your Bankruptcy

You don't lose everything in bankruptcy. When you file for bankruptcy relief, almost all property you own becomes property of the bankruptcy estate. You can protect property and keep it from creditors using "bankruptcy exemptions," the laws that allow filers to keep property they'll need to work and live.

Creditors receive payment when an asset in property of the estate can't be protected with a bankruptcy exemption. In Chapter 7 bankruptcy, the bankruptcy trustee can take or sell your nonexempt asset, the property that isn't protected by an exemption, and distribute the proceeds to your creditors. In Chapter 13, you pay the value of nonexempt assets through the Chapter 13 repayment plan.

But a few assets aren't part of the bankruptcy estate and are always safe from creditors in bankruptcy. Most retirement accounts are protected in bankruptcy because they are either ERISA-qualified accounts and not property of the estate, or they're exempt. Savings plans, stock options, and profit-sharing plans usually aren't protected but check with your employer and state exemption laws.

ERISA-Qualified Retirement Accounts Aren't Part of the Bankruptcy Estate

401ks and other Employee Retirement Income Security Act (ERISA) retirement accounts typically aren't part of your bankruptcy estate. Most employer-sponsored retirement plans are ERISA-qualified accounts but check with your employer.

ERISA-qualified retirement plans have transfer restrictions that protect the funds in your account from creditors. The Supreme Court has ruled that this transfer restriction is enforceable in bankruptcy and excludes ERISA-qualified plans from property of the bankruptcy estate. As a result, an ERISA-qualified 401k account can't be used to pay your creditors.

Additional Retirement Account Protections in Bankruptcy

If your retirement plan is included in the bankruptcy estate, federal and state laws provide exemptions to protect your account in bankruptcy. Regardless of which state you live in, federal law protects all retirement accounts exempt from taxation under certain sections of the Internal Revenue Code.

Funds in non-ERISA plans like IRAs are protected up to $1,512,350 per person under federal law. (11 U.S.C. § 522(n).) As of April 1, 2022, this figure is current and will change on April 1, 2025.

Learn more about federal bankruptcy exemptions. Many states have exemptions that cover retirement accounts in bankruptcy.

When Is a Retirement Account Not Protected in Bankruptcy?

If you withdraw money from your retirement account and purchase other assets or place the money in a regular bank account before filing your case, it won't receive the special protections afforded to retirement funds. Also, your retirement plan won't be protected in bankruptcy if it is fraudulent or otherwise not a legitimate retirement account. Find out about protecting bank accounts in bankruptcy.

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