Are Retirement Accounts Protected in Bankruptcy? (FL)

When considering bankruptcy, it’s important to understand which assets can be protected and which are at risk. In Florida, residents are often able to retain significant assets due to the state’s generous exemptions.

Key assets that are most often protected in Florida bankruptcy are different types of retirement accounts (IRA, 401k, and so on).

Florida’s “Opt Out” and Its Impact on Bankruptcy Exemptions

Unlike many states, Florida has “opted out” of the Federal exemptions, placing limits on residents filing for bankruptcy by only allowing them to claim state law exemptions.

The good news is that the State of Florida’s state law exemptions tend to be more generous than the Federal exemptions when it comes to retirement accounts.

Protection for IRAs & Other Types of Retirement Accounts

Under Florida law, specifically section 222.21(2)(a), the bankruptcy debtor’s IRA, Roth IRA, 401k, 403b, pension, and similar retirement accounts are exempt. This is particularly important as these forms of tax-deferred retirement plans often hold a substantial portion of an individual’s financial wealth.

Some specific examples of the retirement plans that are covered under this exemption include:

  • IRA accounts
  • Roth IRA accounts
  • 401k accounts
  • 403b accounts
  • Teachers’ pension plans
  • Pension plans for county officers and employees
  • State officers and employees’ pension plans
  • Police officers’ pension plans
  • Firefighters’ pension plans

In addition to these, according to the state of Florida, SEP-IRAs (Simplified Employee Pension Individual Retirement Accounts) are also protected from creditors.

Are Inherited & Rollover IRAs Protected?

A picture of Are Retirement Accounts Protected in Bankruptcy? (FL) with Independence Law

In an interesting twist, the Sunshine State’s protection of inherited IRAs overrides a U.S. Supreme Court ruling. This came after the Supreme Court decision in Clark vs. Rameker, where it was ruled that inherited IRAs do not qualify as “retirement funds” within the meaning of the bankruptcy exemption. However, Florida bypasses this ruling by using 522(b)(2), which permits a state to opt-out of federal exemptions.

A 2011 amendment to Florida Statute 222.21 further extended the definition of an exempt IRA to include both rollover and inherited IRA accounts under the umbrella of protection:

Rollover IRAs in FL Bankruptcy

A rollover IRA is an account that you’d establish when you leave a job and “roll over” the funds from your old employer’s retirement plan, like a 401(k), into this new IRA. This allows you to maintain the tax-advantaged status of your retirement savings even when you’re transitioning between jobs or retiring.

For example, imagine you’ve been contributing to a 401(k) with your old job, and then you decide to move to another company. You could “roll over” those 401(k) funds into a rollover IRA without having to pay any taxes or penalties for early withdrawal. The good news is that, according to the amendment to Florida Statute 222.21, this rollover IRA is exempt in a bankruptcy proceeding.

Inherited IRAs in FL Bankruptcy

The other special type of IRA mentioned is an “inherited” IRA. As the name suggests, these are IRA accounts that you might inherit from someone else, often a parent or spouse.

Let’s say your mother had an IRA, and when she passed away, she left it to you. That’s now an inherited IRA in your name. The 2011 amendment ensures that this type of IRA is also protected during bankruptcy.

Limitations to The Protection of Retirement Accounts

It’s important to note that while the accounts themselves are protected, distributions or early withdrawals (for example, money you originally withdraw from an IRA to cover medical bills/debts but still have sitting in your bank account) are not necessarily shielded against creditor claims in Florida. This means that, after the money has been withdrawn from these accounts, it loses its protected status.

In rare instances, some retirement accounts may not be protected. These tend to be exceptional cases, often related to how the retirement account, such as a self-directed retirement account or a SEP-IRA, was managed by the debtor. However, unless unusual activities were performed with the account, this is typically not a concern for most individuals.

The Role of a Florida Bankruptcy Lawyer

If you’re considering bankruptcy, consulting with Florida bankruptcy attorneys can be invaluable. With their experience and expertise, they can help you understand the intricacies of bankruptcy law, which exemptions may apply to your personal situation, and guide you through the entire process.

A picture of Are Retirement Accounts Protected in Bankruptcy? (FL) with Independence Law

Despite the complexity of bankruptcy laws, with proper legal advice, it’s possible to navigate this challenging process while potentially preserving key assets such as your retirement accounts.

While filing bankruptcy in Florida can feel overwhelming, the state’s generous exemptions provide a level of protection for retirement accounts, allowing residents a more secure financial future after bankruptcy. However, it’s important to consult with a qualified legal professional when considering bankruptcy to ensure that you’re making the most informed decisions about your financial future.

Disclaimer: The information presented in this article and across this website is presented for general educational purposes only. Although this article discusses legal issues, it is not legal advice. Please be aware that laws and the content of any linked websites or pages might have evolved since the publication of this article, and as such, we cannot guarantee the ongoing accuracy of any presented information. Utilizing this article does not establish an attorney-client relationship.