Under 2005 bankruptcy reform, IRAs now enjoy projection when a debtor files for bankruptcy. Traditional and Roth IRA accounts with up to $1,171,650 in them are protected from creditor seizure during bankruptcy. That amount is reviewed very three years and may be increased based on the consumer price index (CPI). However, the $1,171,650 limit on IRA’s doesn’t include amounts rolled over from SEP IRAs, SIMPLE IRAs and other employer-sponsored retirement plans, including qualified plans.
If a debtor filing for bankruptcy has a SEP or Simple IRA, the assets in those accounts are excluded from the bankruptcy estate for unlimited amounts. For example, if a debtor in bankruptcy had a SEP with over $3 million in it, all of that amount would be excluded from the bankruptcy estate.
However if a debtor has inherited an IRA, SEP or Simple IRA from someone else, that account would lose its protection under the bankruptcy code. There was a case in Texas where a daughter inherited an IRA from her mother and later filed for bankruptcy. The daughter asserted that the IRA should receive the protection of up to $1 million during bankruptcy; but the bankruptcy court did not agree. The Texas bankruptcy court ruled that the IRA would only receive protection during bankruptcy if they account was in the debtor’s name and it was not because when a person inherits an IRA from anyone other than their spouse, the account remains in the original account holders name and the person who inherited the account is simply named as the beneficiary.