IRA Income and Age Restrictions

An Individual Retirement Account (IRA) can be an effective means for protecting your financial assets before filing bankruptcy, as funds places in retirement accounts are generally classified as protected assets in Chapter 7 and Chapter 13 cases.  The amount of an IRA account that is protected in bankruptcy is far above and most other types of assets.  An IRA is a type of protected retirement account in bankruptcy that receives unlimited protection in most cases. This is in contrast to cash, and money in checking and savings accounts, which do not receive nearly the same level and amount of protection.


Let’s say, for example, that you have a $20,000 car and $10,000 in your bank account and you need to file a Chapter 7 or Chapter 13 bankruptcy very soon.  Under the Federal bankruptcy exemptions, you would be entitled to a $3,500 vehicle exemption, leaving $16,500 of your car unprotected.  You could then use $16,500 of your Wildcard exemption (currently about $23,000) to completely protect your car.  This would reduce your Wildcard exemption down to $6,500 ($23,000 – $16,500).   The remaining $6,500 of your Wildcard exemption would not be enough to protect your $10,000 in the bank.  $3,500 would still be unprotected.  In such a case, you can put the $3,500 into an IRA and the money will be protected, assuming you have not exceeded the IRA limit both for depositing funds each year and the maximum amount protected under bankruptcy law.


But before you plan on putting your money in an IRA before bankruptcy you need to be aware of two very important restrictions on IRA accounts.  First, you can only deposit money into an IRA if had earned income for that year.  You must have earned income that is equal or greater to the amount of money that you are putting into an IRA, though you don’t have to trace the funds.  That means that you can earn $10,000, spend it, then receive a gift for $5,000 and put it into an IRA.


Second, there are age restrictions on depositing money into an IRA.  The age limit for an IRA is for a traditional IRA only.  There is no age limit on a Roth IRA.  Currently, the age limit is 70 years of age.  Specifically, during the year that you turn 70 and 1/2 years old, you can no longer make deposits into a traditional IRA.  But you can make deposits into a Roth IRA.  The main difference between a traditional and Roth IRA is that with a Roth IRA you pay taxes on the money the year that you earn the money, as opposed to a traditional IRA in which you don’t pay taxes now and defer the taxes until the time that you withdraw the funds.