One of your most valuable assets, especially after several years of employment, can be your pension, 401(k) or other retirement account. If you find yourself in financial straits, you might fear that filing for bankruptcy will put those accounts in jeopardy. However, the fact is that most retirement funds are protected in bankruptcy cases. Both federal and New Jersey bankruptcy law provide for making certain property exempt from being liquidated to pay creditors. However, you must choose either the federal or the state exemptions. Each may include limitations on what property and what amounts are protected.

The type of retirement funds you seek to protect determines whether they are eligible for exemptions in bankruptcy. If you choose the federal exemptions, any retirement account covered by the Employee Retirement Income Security Act (ERISA) is fully exempt. That includes plans sponsored by an employer, such as these:

• 401(k) accounts
• 403(b) plans (profit sharing)
• 457(b) plans (deferred compensation)
• Governmental plans
• Tax-exempt organizational retirement plans

The entire amount held in these accounts can be exempted. In order to be protected by ERISA, your plan must meet certain statutory requirements. Notably, the plan must include a clause that prohibits you or your plan administrator from transferring benefits to any third party.

Non-ERISA plans such as the following may also qualify for federal exemption:

• IRA and Roth IRA accounts
• SEP IRA accounts
• Simple IRA accounts

There are limits to the amount of IRA funds that can be exempted in bankruptcy. As of April 1, 2022, the maximum aggregate exemption is $1,512,350. That maximum is subject to periodic cost-of-living increases.

By contrast, New Jersey’s exemptions for retirement funds are more generous. The full amount of your IRA accounts can be exempted. In addition, N.J. law extends protection to the pensions of most state and municipal employees, including teachers, firefighters and police officers.

However, there may reasons for not selecting the N.J. set of exemptions. For example, federal law provides for a homestead exemption, whereas N.J. does not. In determining which set to choose, the best approach is to speak to an experienced New Jersey bankruptcy attorney. The overall goal should be to protect as much of your property as possible while still achieving a full discharge of your debts.

The Law Offices of James C. Zimmermann helps people throughout New Jersey’s Sussex and Passaic counties in obtaining bankruptcy protection from creditors. Call us at 973-764-1633 or contact us online to arrange a free initial consultation.