One of the debtor-friendly provisions of BAPCPA (the “new” bankruptcy law) is the new IRA exemption. One can now exempt up to one million dollars in an IRA account. Section 522 of the Bankruptcy Code states, in relevant part:
(n) For assets in individual retirement accounts described in section 408 or 408A of the Internal Revenue Code of 1986, other than a simplified employee pension under section 408(k) of such Code or a simple retirement account under section 408(p) of such Code, the aggregate value of such assets exempted under this section, without regard to amounts attributable to rollover contributions under section 402(c), 402(e)(6), 403(a)(4), 403(a)(5), and 403(b)(8) of the Internal Revenue Code of 1986, and earnings thereon, shall not exceed $1,000,000 in a case filed by a debtor who is an individual, except that such amount may be increased if the interests of justice so require.
It is clear-cut that $1,000,000 in an IRA is exempt. However, there are two interesting phrases in the subsection. One is “without regard to amounts attributable to rollover contributions.” Some have interpreted this as meaning that the part of an IRA that is comprised of rollover funds is not counted towards the exemption total. Others say the phrase means that the $1,000,000 limit is not reduced by the presence of rollover funds. The second interpretation seems to be the better reading. The stakes could be high in a case where a debtor planned to rely on the first interpretation to, say, attempt to exempt $2,000,000 in IRA funds.
The other interesting phrase is the one that states that the exemption could be increased if justice so required. It is hard to see a circumstance where a debtor would want to rely on this discretionary provision. However, I can envision circumstances — such as disability — where a debtor might be allowed to exempt more than one million dollars in IRA funds.
Most consumer debtors do not have anything close to a million dollars in an IRA. But this is an important new provision of the Bankruptcy Code for asset protection and planning purposes.
Nicholas Ortiz, Boston Bankruptcy Attorney
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Last modified: February 8, 2007