The treatment of retirement plans in bankruptcy has largely depended on the type of plan involved. Assets in employer-sponsored, tax-qualified retirement plans (e.g., pension, profit sharing and 401(k) plans) have generally been protected from the reach of creditors since the decision of the U.S. Supreme Court in Patterson v. Shumate (1992). In the Patterson case, the Court determined that such assets are excluded from the property of the bankruptcy estate.

Outside of bankruptcy, state law applies in the determination of whether a retirement plan may be seized by creditors. Where state law does not protect retirement plan assets outside of bankruptcy, the debtor may be forced to file for bankruptcy in order to take advantage of new bankruptcy laws. As a last alternative, bankruptcy can be invaluable in protecting IRAs and other non-qualified plans.  In other words, a creditor should not borrow or withdraw funds from a qualified or IRA retirement account to satisfy unsecured creditors.  The creditors cannot touch the retirement accounts in bankruptcy, so borrowing against or liquidating retirement accounts is almost always ill advised.

Under the current federal exception, the amount of the protected IRA assets is limited to $1 million. In addition, an individual can roll assets from a qualified employer plan into an IRA with 100 percent protection of the rollover amount in bankruptcy, regardless of the state in which they reside. 

IRC section 401(a)—tax-qualified retirement plans (pensions, profit-sharing and 401(k) plans among the other miscellaneous qualified plans are granted 100% federal protection in bankruptcy.  The key is

IRA plans are not qualified plans and thus do not enjoy 100% protection in bankruptcy as do qualified plans such as pensions, 401ks and profit sharing plans.  However, the federal government does provide sizable protection for IRA accounts.  A debtor is currently entitled to protect up to $1,000,000 (one million) in IRA funds.  In order to qualify, the funds must be in a traditional or Roth IRA account.