In early April, the financial world was abuzz with news that bankruptcy protection had been extended to IRAs by the Supreme Court ruling in Rousey v. Jacoway. Unfortunately, there were actually some significant limits on the protection afforded by this ruling. However, later in the month, a new law was signed that also addressed bankruptcy protection, effectively rendering the Rousey v. Jacoway ruling irrelevant.

The new law, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, is effective for bankruptcies filed on or after October 17, 2005. Among other things, the Act now extends the same bankruptcy protection to IRAs previously only available through a qualified plan (this protection was also extended to 457 plans, 403(b) plans, SEPS and SIMPLEs). Specifically, rollover contributions to IRAs (i.e., those originating from a qualified plan) are now fully protected in the event of a bankruptcy. Non-rollover contributions in IRAs are protected up to $1 million.

An important distinction needs to be made between bankruptcy protection and creditor protection. As the name implies, bankruptcy protection only occurs when a debtor has filed for bankruptcy. Protection from creditors may be sought without a bankruptcy filing. This distinction is important, though, because the new law only extends bankruptcy protection—not creditor protection—to IRAs. ERISA-covered plans are afforded full creditor protection under a 1992 Supreme Court ruling. However, state law, not federal law, determines creditor protection in non-ERISA plans and IRAs.