IRA vs 401(k) Creditor Protection in Bankruptcy (2026 Cap)

What the law says: two exemptions, one cap

A debtor in bankruptcy may exempt some property from the estate. For retirement money there are two separate doors, and the cap is on only one.

The first is the exemption in 522(b)(3)(C) (and, for debtors using the federal list, 522(d)(12)): “retirement funds to the extent that those funds are in a fund or account that is exempt from taxation under section 401, 403, 408, 408A, 414, 457, or 501(a)” of the Internal Revenue Code. The paragraph itself has no dollar figure. The dollar limit comes from 522(n), which speaks only to “individual retirement accounts described in section 408 or 408A,” other than SEP and SIMPLE IRAs.

The second door is not an exemption at all. Section 541(c)(2) says that “a restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable nonbankruptcy law is enforceable in a case under this title.” In Patterson v. Shumate, 504 U.S. 753 (1992), the Court held that “an anti-alienation provision in a qualified pension plan constitutes a restriction on transfer enforceable under ‘applicable nonbankruptcy law’” for that purpose, so the plan interest (there valued at $250,000) never enters the estate. In the same opinion the Court noted that IRAs are “specifically excepted from ERISA’s anti-alienation requirement.” That one sentence is why an IRA needs the exemption and a plan does not.

On the last row, the regulation says a plan “under which only partners or only a sole proprietor are participants covered under the plan will not be covered under title I.” Section 1056(d) is in title I. Our reading: an owner-only plan relies on the exemption and on state law, not on ERISA. We did not read case law on how courts treat these plans, so treat that row as a question for counsel.

The cap, with its history

Section 104 of the Bankruptcy Code resets the dollar amounts on April 1 every three years. The Judicial Conference's notice says the adjustment follows “the change in the Consumer Price Index for All Urban Consumers” for the three years before January 1, 2025, rounded to the nearest $25. The current notice is 90 FR 8941 (February 4, 2025). A correction at 90 FR 10643 on February 25, 2025 swapped two numbers in another row of the table and does not touch the 522(n) line.

The Code notes on Cornell's copy of section 522 date the current notice to January 30, 2025; the Federal Register shows February 4, 2025. The amount is the same. Because the adjustment does not apply to cases begun before April 1, 2025, the filing date, not the date of the hearing, picks the row.

Two features of the cap are easy to miss. It is an aggregate over all of a debtor's traditional and Roth IRAs, not a figure per account. And it can move up: the statute lets the amount “be increased if the interests of justice so require,” a case-by-case judgment we have no data on.

What changes when a 401(k) is rolled into an IRA

This is the part most pages skip. In a rollover the money moves from a place where the protection is written into the plan (ERISA) to a place where it depends on the exemption and its cap. Three things follow from the text.

1. The legal basis changes. In the plan, benefits are covered by the anti-alienation clause and Patterson. In the IRA, Patterson says the ERISA clause does not apply, so the exemption does the work.

2. The cap may not bite on the rolled-over part. Section 522(n) is applied “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)... and earnings thereon.” Section 402(c) is the rollover of an eligible distribution from a qualified plan. Our reading: money that came from a 401(k) by rollover is outside the $1,711,975 count, and so are its earnings. The list does not name an IRA-to-IRA rollover, a Roth conversion, or a rollover from a governmental 457(b) plan, so we would not assume those are outside the count. The statute text does not say how to trace money when rollover funds and contributions sit in one IRA; that is a factual and legal question for counsel, and a reason some people keep a rollover IRA separate (our reading, not a rule we read).

3. The route you use matters. Section 522(b)(4)(C) says a direct transfer between exempt accounts “shall not cease to qualify for exemption.” A distribution that is an eligible rollover distribution also keeps the exemption, as does an amount redeposited “not later than 60 days after the distribution.” Our guide to 401(k) rollovers to an IRA covers the tax side (withholding on a check made out to you); this page adds that the creditor-protection side is simplest with a direct transfer.

There is also a proof issue. Under 522(b)(4)(A), funds in a retirement fund with a favorable determination letter in effect are “presumed to be exempt from the estate.” A fund without one is exempt only “if the debtor demonstrates that” no prior contrary determination exists and the fund is in substantial compliance (or the debtor is not materially responsible for the failure). Our reading: an IRA has no determination letter of this kind, so the burden of showing compliance can fall on the owner. We did not read IRS procedures on IRA letters, so check this point.

Worked example B (our arithmetic). An IRA holds $1,000,000 from contributions and earnings plus $1,400,000 rolled over from a 401(k). Counted toward the cap: $1,000,000, below $1,711,975, so on our reading all $2,400,000 is within the exemption. If the same $2,400,000 came only from contributions and earnings (example A), $1,711,975 is protected and $688,025 is above the cap.

Inherited IRAs after Clark v. Rameker

The facts are short. A woman inherited a traditional IRA worth just over $450,000 and took distributions; she and her husband filed Chapter 7 in October 2010 with the account worth roughly $300,000 and claimed it exempt. The Supreme Court held, on June 12, 2014, that “funds held in inherited IRAs are not ‘retirement funds’” under 522(b)(3)(C). It looked at the account's legal characteristics, not the debtor's plans, and found three:

• “the holder of an inherited IRA may never invest additional money in the account”;
• holders “are required to withdraw money from such accounts, no matter how many years they may be from retirement”;
• the holder “may withdraw the entire balance of the account at any time—and for any purpose—without penalty.”

The Court said that allowing the exemption would turn the Code's “fresh start” into a “free pass.” It also noted that the debtors proceeded under state law and that the federal-list exemption in 522(d)(12) is identical, so the holding reaches both.

What Clark did not decide: it addressed inherited IRAs, in the Court's words the question “whether funds contained in an inherited individual retirement account (IRA) qualify as ‘retirement funds.’” We did not find an answer in the sources we read for inherited 401(k) or other plan benefits, and we do not assert one. A debtor may also claim any exemption that “State or local law” provides under 522(b)(3)(A); some states have statutes that cover inherited IRAs, and we have not mapped them (no state matrix on this page).

The spouse rule sits underneath all this. The Court described it: “the spouse has a choice: He or she may ‘roll over’ the IRA funds into his or her own IRA,” or keep it as an inherited IRA, while a non-spouse “may not roll over the funds.” A spouse who rolls over holds an IRA of his or her own, inside the cap; one who keeps it inherited is on the Clark side. The tax side of that choice is on our inherited IRA 10-year rule page and our inherited 401(k) page. Clark's own description of the payout rules (five years or annual distributions) predates the 10-year rule now in force, but the Court's reasoning rested on the no-contributions, forced-withdrawal and no-penalty features, which are described there too.

Worked example D (our arithmetic). A non-spouse heir holds an $800,000 inherited IRA when filing. Under Clark the federal retirement-funds exemption protects $0 of it; whether any state exemption statute protects some of it depends on the state.

Real estate and other illiquid assets inside the IRA

The exemption protects the account, not the asset. Three points follow from the sources.

The cap counts value, and value is a number someone must fix. Section 522(n) caps “the aggregate value of such assets.” A custodian's yearly report on a rental, an LLC interest or a non-traded REIT share is a reporting figure; the figure that matters in a bankruptcy is the one a court accepts. We found no rule fixing how that is done, so we say only that the more of an IRA is illiquid, the less certain the number is, and a cap measured near $1.7 million can depend on it. Our guides to self-directed IRA real estate and the custodians that hold these assets cover how such assets are held.

A prohibited transaction can end the protection. Section 408(e)(2)(A) says that if the owner or a beneficiary “engages in any transaction prohibited by section 4975 with respect to such account, such account ceases to be an individual retirement account as of the first day of such taxable year,” and 408(e)(2)(B) treats it as a distribution of “the fair market value (on such first day) of all assets in the account.” Section 4975(c)(1) lists, among others, the “sale or exchange, or leasing, of any property between a plan and a disqualified person” and the “transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan.” The family of an individual includes “his spouse, ancestor, lineal descendant, and any spouse of a lineal descendant” (4975(e)(6)). Our reading: renting an IRA-owned property to a child, or using it yourself, is the kind of act that can turn the whole account into a taxable distribution, and since the exemption applies only to funds “in a fund or account that is exempt from taxation” under section 408, the creditor protection goes with the tax status. We did not read case law applying this to bankruptcy.

Worked example C (our arithmetic). An IRA holds $2,400,000, of which $900,000 is a rental owned through an LLC. If a prohibited transaction occurs in the year, the whole $2,400,000 is treated as distributed on the first day of that year, not just the $900,000 property.

Holding the property through an LLC outside the IRA is a different subject, covered in our LLC for rental property guide; the IRA exemption does not help with property you own personally.

What the exemptions do not stop

Protection in a bankruptcy is not protection from every claimant.

What a reader can do with this

• Add up your IRAs. The cap is on the total of traditional and Roth IRAs. If the total is well under $1,711,975, the cap is not your problem; the question is the state and the account type.
• Separate the rollover money. If an IRA includes a 401(k) rollover, ask the custodian whether it can be kept in its own account, and keep the plan statements showing where it came from. The statute disregards that amount in the cap but does not tell you how to prove it.
• Choose spouse or inherited status on purpose. A surviving spouse who rolls over gets an IRA of his or her own; one who keeps an inherited IRA gets the Clark result. The tax rules differ too, so settle both before moving money.
• Check what the IRA owns. For any rental, LLC or fund interest, ask whether any party to a lease, loan or sale is the owner or a family member (4975(e)(6)), and whether the owner personally benefits. If yes, take that to a lawyer before the year-end.
• Look at the plan type. An owner-only solo 401(k) is outside title I (29 CFR 2510.3-3(b)); a plan with employees is inside it.
• Do not rely on this page for your state. Ask counsel which state exemptions apply to IRAs, inherited IRAs and plans where you live, and whether a non-bankruptcy creditor changes the answer.

This is analysis of public documents, not investment, legal or tax advice.

FAQ

Sources, read and saved on October 28, 2026: 11 U.S.C. 522, 541 and 104 (Cornell Legal Information Institute); Judicial Conference of the United States, Adjustment of Certain Dollar Amounts Applicable to Bankruptcy Cases, 90 FR 8941 (February 4, 2025) with correction 90 FR 10643, and 87 FR 6625 (February 4, 2022), federalregister.gov; Clark v. Rameker, 573 U.S. 122 (2014), United States Reports, govinfo.gov; Patterson v. Shumate, 504 U.S. 753 (1992), Cornell LII; 29 U.S.C. 1056; 26 U.S.C. 408 and 4975; 26 CFR 1.401(a)-13; 29 CFR 2510.3-3; Investment Company Institute, Quarterly Retirement Market Data, Second Quarter 2026 (September 17, 2026). Worked examples are our arithmetic.