A 401(k), 403(b), pension, or other ERISA-qualified plan is fully protected in a California bankruptcy, in either exemption system, with no dollar limit. IRAs are protected too, under a support-based test in System 1 and a federal cap of well over a million dollars in System 2. The one way to lose retirement money in bankruptcy is to take it out before you file.
ERISA plans never enter the estate
Your 401(k) isn't exempt in the ordinary sense. It's better than exempt. Under federal law, a qualified ERISA plan with an anti-alienation clause isn't property of the bankruptcy estate at all. The trustee can't reach it, doesn't value it, and doesn't care whether it holds $4,000 or $400,000.
That covers most employer plans: 401(k)s, 403(b)s for teachers and hospital staff, 457 plans for public employees, defined-benefit pensions, and the union pension a longshoreman in San Pedro has been paying into for thirty years. It doesn't matter which system you choose. This protection sits above the state exemption lists entirely.
We still list the account on Schedule A/B, because the petition asks for everything you own. Listing it and claiming it isn't property of the estate is routine. Leaving it off is a problem.
IRAs: protected, with two different tests
IRAs aren't ERISA plans, so they're handled by exemption law rather than excluded from the estate. That's where the system choice comes in.
Under System 1, CCP § 704.115 protects an IRA to the extent it's reasonably necessary to support you and your dependents when you retire. A 58-year-old with a $150,000 IRA and no pension will almost always keep all of it. A 32-year-old with a $150,000 IRA, a high salary, and a spouse with a 401(k) invites a closer look, because the "reasonably necessary" test asks what you'll need, not what you have. Trustees in the Central District rarely press this unless the account is large relative to the person's situation, but they can.
Under System 2, the state exemption tracks the federal approach, and traditional and Roth IRAs are protected up to a federal cap that's adjusted every three years and currently sits well over a million dollars. Rollovers from an employer plan into an IRA aren't subject to the cap at all. For most people the System 2 treatment is simpler and more predictable.
| Account | System 1 | System 2 |
|---|---|---|
| 401(k), 403(b), 457, pension | Fully protected, not estate property | Fully protected, not estate property |
| Traditional or Roth IRA | Amount reasonably necessary for support | Federal cap, well over $1 million |
| Rollover IRA from employer plan | Reasonably necessary test | No cap on rolled-over funds |
| SEP or SIMPLE IRA (self-employed) | Reasonably necessary test | Protected; treated like an IRA |
| Inherited IRA | Uncertain; fact-specific | Generally not protected as a retirement fund |
Do not cash out before you call
Someone gets served with a credit card lawsuit, panics, and pulls $30,000 out of their 401(k) to pay it down. Three months later they call us because the other cards are still there. The $30,000 is gone, the IRS wants income tax on it plus a 10% early withdrawal penalty, and the debt that was paid would have been discharged for the price of a Chapter 7 anyway.
This happens constantly. It's the single most expensive mistake we see, and it's made by careful people trying to do the right thing.
The retirement account was untouchable. The moment it became cash in a checking account it became ordinary property, and ordinary property is what the trustee looks at. If that cash was used to pay a relative, it's a preference the trustee can recover from the relative. If it's still sitting in the bank, it's exposed under System 1 and only partially covered by the wildcard under System 2. Leave the account alone until you've talked to a lawyer.
Loans against a 401(k)
A 401(k) loan isn't a debt in the ordinary sense. You borrowed from yourself, and the plan repays itself through payroll deduction. Bankruptcy doesn't discharge it, because there's no creditor to discharge. If you stop repaying, the plan treats the balance as a distribution and you owe tax on it.
In Chapter 7 the loan repayment continues quietly out of your paycheck. In Chapter 13 it's more interesting: the repayment is an allowed deduction when calculating what you can afford to pay creditors, and when the loan is repaid mid-plan, the trustee may expect that money to flow to the plan instead. We plan for that at confirmation, not when it happens.
Accounts that get a second look
A few kinds of retirement money aren't as clean as a plain 401(k).
- Inherited IRAs. The Supreme Court held in 2014 that an inherited IRA isn't a "retirement fund" under the federal exemption. Under California's System 1 the answer is less settled. Treat an inherited IRA as an open question, not a safe asset.
- Self-directed IRAs holding real estate or a business. Protected in theory, but prohibited transactions can disqualify the account, and trustees know to ask.
- Annuities marketed as retirement products. Some qualify under CCP § 704.100 or § 704.115; some are just investments with a retirement label. The contract decides.
- Recent large contributions. Dumping $50,000 into an IRA the month before filing to shield it draws objection and can be unwound.
- Crypto in a retirement wrapper. Fine if the custodian and the plan are legitimate. Not fine if it's a wallet you control with "IRA" written on a spreadsheet.
After you file
In Chapter 7, contributions continue and the account is yours. Withdrawals after the case is filed are your business, though taking money out during the four months the case is open and spending it visibly invites questions at the 341 meeting on Zoom.
Chapter 13 is a five-year relationship with a trustee, and voluntary contributions during the plan are treated differently by different judges in the Central District. Some allow them as a reasonable expense; some view a large contribution as money that belongs to creditors. This is one of the factors that can push someone toward Chapter 7 rather than Chapter 13 when both are available. If protecting your ability to keep saving matters to you, say so on the first call.
the retirement account is the one thing I wish people would ask about before they do anything else. Every month someone tells me they cashed out a 401(k) to pay a card down, or a lawsuit, or a mortgage they were going to lose anyway. The account was untouchable. The debts were dischargeable. They turned the only protected asset they had into taxable cash and spent it on debt that would have vanished for $1,850 and a court fee. I've never had to tell a client the trustee took their pension. I've told plenty that the money they pulled out of it was gone.
Questions people ask about this
Is my 401(k) protected if I file bankruptcy in California?
Yes, completely. A 401(k) or other ERISA-qualified plan isn't even property of the bankruptcy estate, so the trustee can't reach it regardless of balance or which exemption system you choose. The same goes for 403(b)s, 457 plans and pensions.
Are IRAs protected in a California bankruptcy?
Yes, with limits. Under System 1 an IRA is protected to the extent reasonably necessary for your support in retirement. Under System 2 it's protected up to a federal cap of well over a million dollars, with rollovers from an employer plan uncapped. Most people are fully covered either way.
Should I cash out my retirement account to pay debts before filing?
No. Money in the account is protected. Once withdrawn it's taxable, subject to a 10% penalty if you're under 59½, and exposed as ordinary cash. The debts you'd pay with it are usually dischargeable anyway. Talk to a lawyer before touching it.
Does bankruptcy wipe out a 401(k) loan?
No. A 401(k) loan is money you borrowed from yourself and repay through payroll, so there's no creditor to discharge. If you stop repaying, the plan treats the balance as a taxable distribution. In Chapter 13 the repayment is factored into your plan budget.
Is an inherited IRA protected?
Probably not under the federal approach, and the answer under California's System 1 is unsettled. Treat an inherited IRA as an asset that needs specific analysis before filing rather than assuming it's safe.
Do I have to list my retirement accounts on the bankruptcy petition?
Yes. Every asset gets listed on Schedule A/B, including accounts that are fully protected. Listing a 401(k) and noting it isn't estate property is routine. Leaving it off is a disclosure problem that can jeopardize your discharge.
Talk it through with the attorney
If you're thinking about pulling money from a 401(k) or IRA to deal with debt, call first. Thirty minutes on video with Naomi will tell you whether the account is already safe and whether the debt would be discharged without touching it.