New Jersey Bankruptcy Attorney Daniel Straffi, Jr. Explains How Retirement Accounts Are Protected During Bankruptcy

TOMS RIVER, NJ - Individuals filing for bankruptcy in New Jersey may be concerned about losing their retirement savings, but federal and state laws provide significant protections for most types of retirement accounts. New Jersey bankruptcy attorney Daniel Straffi, Jr. of Straffi & Straffi Attorneys at Law (https://www.straffilaw.com/can-i-keep-my-401k-in-bankruptcy-in-nj/) explains how different retirement accounts are treated during the bankruptcy process and what New Jersey filers should know before making decisions that could affect their long-term financial security.

According to New Jersey bankruptcy attorney Daniel Straffi, Jr., employer-sponsored retirement plans such as 401(k)s, 403(b)s, and defined benefit pensions are fully excluded from the bankruptcy estate under the Employee Retirement Income Security Act of 1974 (ERISA). Because of the anti-alienation rule in 29 U.S.C. Section 1056(d)(1), a bankruptcy trustee cannot access funds held in these accounts, and there is no dollar limit on this protection. "Many people assume that filing for bankruptcy means giving up everything they have saved for the future," explains Straffi. "In most cases, retirement accounts receive strong federal protection that keeps those savings intact."

New Jersey bankruptcy attorney Daniel Straffi, Jr. notes that traditional and Roth Individual Retirement Accounts are handled differently under the law. Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), these accounts are exempt up to $1,711,975 in the aggregate for cases filed on or after April 1, 2025, with the next adjustment scheduled for April 2028. Simplified Employee Pension IRAs and Savings Incentive Match Plan for Employees IRAs receive full protection with no dollar cap, as they are treated like ERISA-qualified plans for bankruptcy purposes. Rollover IRAs that contain funds transferred from an ERISA-qualified plan also retain their full, unlimited protection and do not count against the contributory IRA cap.

Attorney Straffi highlights that New Jersey filers have a meaningful choice when it comes to exemptions. Under N.J.S.A. 25:2-1(b), retirement accounts that qualify under federal tax law receive full protection with no dollar cap when filers use New Jersey state exemptions. "For someone whose IRA balance exceeds the federal cap, choosing New Jersey exemptions could protect the entire amount," Straffi adds. This distinction is particularly important for individuals with substantial IRA savings who might otherwise lose a portion of their funds under the federal exemption system.

The firm also advises that one of the most notable features of New Jersey's exemption framework involves inherited IRAs. In Clark v. Rameker (2014), the United States Supreme Court held that inherited IRAs are not protected under federal bankruptcy law. However, the United States Bankruptcy Court for the District of New Jersey ruled in In re Andolino (2015) that inherited IRAs can be protected under state law, finding that N.J.S.A. 25:2-1(b) shields property held in a qualifying trust. This means an inherited IRA is not part of the bankruptcy estate when New Jersey exemptions are used, providing an added layer of protection that is unavailable in most other states.

Straffi cautions that both Chapter 7 and Chapter 13 bankruptcy protect existing retirement account balances, but the wrong actions before filing can undo those protections entirely. Withdrawing funds from a retirement account to pay off debts before filing is the most common and costly mistake, as those funds immediately lose their protected status and become subject to seizure by the bankruptcy trustee. In addition to losing protection, early withdrawals often trigger income tax liability and a 10% penalty for individuals under age 59 and a half. "People often try to do the right thing by paying down bills before filing, but withdrawing retirement funds to do so almost always makes the situation worse," he notes. Making large contributions or rushing to pay off 401(k) loans just before filing can also raise concerns, as the court may view those actions as an attempt to shield assets from creditors.

The team at Straffi & Straffi Attorneys at Law represents clients at the Clarkson S. Fisher U.S. Courthouse at 402 East State Street in Trenton, where bankruptcy cases for Ocean County and Toms River residents are heard. The firm handles Chapter 7, Chapter 13, and debt negotiation matters for individuals and families throughout Central and Southern New Jersey. For those considering bankruptcy and concerned about preserving retirement savings, consulting with an experienced New Jersey bankruptcy attorney may help protect long-term financial security.

About Straffi & Straffi Attorneys at Law:

Straffi & Straffi Attorneys at Law is a Toms River-based law firm dedicated to representing individuals and businesses in bankruptcy, divorce, and criminal defense matters. Led by attorney Daniel Straffi, Jr., the firm brings over 40 years of combined bankruptcy experience and serves clients throughout Ocean County and Central and Southern New Jersey. For consultations, call (732) 341-3800.

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