Inherited Retirement Accounts and Bankruptcy: What You Can Keep vs. What You Could Lose

by Luke Homen

You’re dealing with two overwhelming situations at once. You just inherited your parents’ retirement account, but you’re also drowning in debt and considering bankruptcy. Now you’re worried: Will the bankruptcy court take away the money your loved one worked their whole life to save?

Fortunately, inherited retirement accounts get different treatment in bankruptcy than regular inheritance money. Some of these accounts have strong legal protection, while others could be at risk. The type of account, how much money is involved, and Oklahoma state’s laws all matter.

The rules are complex, and making the wrong move could cost you thousands of dollars that were meant to help secure your future. That’s why you need to talk to an experienced Oklahoma bankruptcy attorney who understands retirement account laws. At Convenient Bankruptcy, our attorneys will review your specific situation and protect as much of your inheritance as possible.

Don’t let confusion or fear make you wait too long to get help. Your inherited retirement money might have more protection than you think, but only if you take the right steps.

What Makes Inherited Retirement Accounts Different

When you inherit money from a regular bank account or investment account, that money usually becomes part of your assets in bankruptcy. But retirement accounts have special rules because Congress wanted to protect people’s retirement savings.

However, inherited retirement accounts sit in a gray area. In 2014, the Supreme Court ruled that inherited IRAs don’t get the same protection as your own retirement accounts. This means creditors might be able to reach some inherited retirement money during bankruptcy.

However, different types of accounts have different rules.

Accounts That Usually Have Strong Protection

• Inherited 401(k)s and Similar Employer Plans: These often keep their protection when you inherit them as long as the funds are still in the plan at the time of the bankruptcy filing. 401(k) plans will likely be shielded from creditors under federal ERISA laws, which provide strong protection even for inherited accounts.

Accounts That Could Be at Risk in Oklahoma

• Inherited Traditional IRAs: These are the most vulnerable. After the Supreme Court decision, inherited IRAs are not protected, and federal bankruptcy statutes allow their seizure. Creditors may be able to take this money to pay your debts.
• Inherited Roth IRAs: Oklahoma law does not provide creditor protection for inherited IRAs beyond federal law. This means inherited Roth IRAs are generally at risk in Oklahoma bankruptcy cases, just like inherited traditional IRAs.
• Inherited SEP-IRAs and SIMPLE IRAs: These usually get treated like traditional IRAs, which means they could be at risk.

What You Can Actually Keep vs. What You Will Lose

Let’s be direct about what happens to your inherited retirement money in Oklahoma bankruptcy:

What You Can Usually Keep:

• Money still in inherited 401(k) plans: As long as you don’t roll this money into an IRA, it stays protected under federal ERISA laws
• Small amounts under Oklahoma exemptions: Oklahoma allows you to keep $1,000 in retirement benefits that aren’t otherwise protected, but this won’t cover most inherited accounts

What You Will Likely Lose:

• All inherited IRA money: This includes traditional IRAs, Roth IRAs, SEP-IRAs, and SIMPLE IRAs. The bankruptcy trustee can take this money to pay your creditors
• Money you’ve already withdrawn: Any distributions you’ve taken from inherited accounts become regular assets that creditors can reach
• Rolled-over funds: If you moved money from an inherited 401(k) into an inherited IRA, you just lost the federal protection

The Gray Areas:

• Inherited accounts with small balances: Some bankruptcy trustees might not pursue very small inherited accounts if the cost of recovery exceeds the benefit
• Accounts still in probate: If the inheritance isn’t complete, the timing of your bankruptcy filing could affect whether the money is considered “yours” yet

Unless your inherited retirement money is still sitting in a 401(k) plan or is a very small amount, you will probably lose it in bankruptcy. The trustee will liquidate inherited IRAs and use that money to pay your creditors.

Don’t Let This Stop You From Getting the Fresh Start You Need

Losing inherited retirement money feels devastating, but bankruptcy might still be your best option. Here’s why: if you’re drowning in debt, creditors can already come after your inherited IRA money through lawsuits and wage garnishments. At least with bankruptcy, you get a clean slate and stop the bleeding.

Plus, bankruptcy lets you keep many other important assets – your home (up to $149,750 in equity), your car, work tools, and household items. You’ll also keep any retirement accounts you earned yourself. The goal isn’t to save every dollar you have right now. The goal is to stop the debt spiral and build a secure financial future.

Many clients tell us that losing their inherited IRA in bankruptcy was worth it to eliminate $50,000 or $100,000 in credit card debt and get their lives back on track. The fresh start bankruptcy provides often outweighs the loss of inherited money, especially if that money would have just gone to creditors anyway.

Or, if there’s enough money available, maybe the best path is just to pay your creditors and not file bankruptcy.  You need to discuss all of this with a lawyer!

Contact Our Oklahoma Bankruptcy Lawyers Today

Your inherited retirement money represents your loved one’s hard work and their hope for your financial security. Don’t let confusion or delay put that legacy at risk.

Ready to protect your inheritance? Contact our experienced Oklahoma bankruptcy team today for a free consultation. We’ll review your inherited retirement accounts and explain exactly what protection options are available in your situation.

Call Convenient Bankruptcy in Oklahoma at 405-296-0069 to schedule a consultation. Time matters. Your inheritance matters. Let us help you keep what’s rightfully yours.