Are IRAs in Illinois Exempt From Creditors?

In a Chapter 7 bankruptcy case, a court-appointed trustee seizes your assets and sells them to pay your debts. Federal and state laws exempt some assets, making that property safe from creditors no matter how much you owe. In Illinois, as in other states, federal law applies to the exemption of individual retirement accounts.

State and Federal Law

Illinois does not have a state-law provision for pensions or retirement savings accounts in bankruptcy. The law defaults to the federal guidelines, which exempts individual retirement accounts, or IRAs, of up to $1.095 million. This covers bankruptcy cases as well as garnishment orders that result from legal actions such as lawsuits.

Other Pension Accounts

In Illinois, there is no dollar limit on other types of tax-exempt, employer-sponsored pension plans, including a simplified employee pension or SEP, a 401(k), a profit-sharing plan or a SIMPLE plan. If you are in bankruptcy, you can exempt these accounts from trustees and debt collectors.

Marital Assets and IRA Types

If you are married and each spouse holds an IRA, federal law exempts both retirement accounts. The exemption extends to traditional IRAs, in which contributions are deductible up to a limited amount, and to Roth IRAs, where withdrawals rather than contributions are tax-free. In theory, you could also apply the Illinois $4,000 "wildcard" exemption to IRA assets, but since very few IRAs hold more than $1.095 million, this would rarely be useful.

Rollovers and Withdrawals

The federal law governing IRA exemptions is found in U.S. Code 11 522(a)(C)(3). It covers "retirement funds to the extent that those funds are in a fund or account that is exempt from taxation under ... the Internal Revenue Code." This includes funds that are rolled over from one tax-exempt IRA to another, or rolled over from an employer-sponsored plan to an IRA.