How Retirement Accounts Are Treated in California Bankruptcy: IRAs, 401(k)s & Pensions

Introduction — Why retirement accounts matter in bankruptcy

Retirement savings are often a debtor’s most valuable asset and the most important source of future support. Understanding which retirement accounts federal bankruptcy law protects, how California exemption rules interact with those protections, and how retirement income affects the bankruptcy means test can change the outcome of a Chapter 7 or Chapter 13 case. This article summarizes current federal protections (for ERISA plans and IRAs), recent California statutory changes affecting judgment collection (AB 2837), how retirement distributions are treated for means-test and plan budgeting purposes, and practical steps to reduce risk.

Key takeaways up front:

• ERISA-qualified employer plans (401(k), 403(b), most private pensions) are generally excluded from the bankruptcy estate while funds remain in the plan.
• Traditional and Roth IRAs receive a federal bankruptcy exemption, subject to an inflation-adjusted cap set by the Judicial Conference (adjusted amounts took effect April 1, 2025).
• California recently amended judgment‑enforcement law (AB 2837, effective Jan. 1, 2025) changing how tax‑qualified retirement accounts are treated by state courts collecting on judgments — but these changes do not eliminate federal bankruptcy protections.

Federal bankruptcy protections: what is (and isn’t) safe in bankruptcy

Two different federal protections matter in bankruptcy:

• ERISA anti‑alienation / §541(c)(2) exclusion: Funds held in ERISA‑covered plans (most 401(k)s, 403(b)s, and many employer pensions) are treated as property that can be excluded from the bankruptcy estate when the plan contains an enforceable anti‑alienation clause. The U.S. Supreme Court confirmed that ERISA anti‑alienation provisions are "applicable nonbankruptcy law" for that purpose. That exclusion means the trustee generally cannot take plan assets that remain inside a properly qualified ERISA plan.
• Bankruptcy Code exemptions for IRAs and rollovers: BAPCPA and the Bankruptcy Code provide a federal exemption for traditional and Roth IRAs (and certain IRAs such as SEPs/SIMPLEs), subject to a statutory dollar limit that is periodically adjusted. The Judicial Conference adjusted the IRA aggregate cap effective April 1, 2025 (see federal notice). Rollovers from employer plans into IRAs may receive special treatment (certain rollovers are not subject to the dollar cap) — proper recordkeeping and traceability are critical.

Important exceptions and limitations:

• Distributions lose plan protection: ERISA protection applies while money remains in the qualified plan; once distributed and commingled with non‑exempt cash, state law may allow creditors to reach those funds. Rollovers done as direct trustee‑to‑trustee transfers preserve protection; distributions rolled into a qualified rollover within the required window are usually safe if properly documented.
• Inherited IRAs: The Supreme Court has ruled that inherited IRAs are not "retirement funds" for purposes of the federal exemption, so they are generally not protected in bankruptcy. If you hold an inherited IRA, expect closer scrutiny.
• Enforcement exceptions: Federal tax levies, certain criminal/civil judgments, and family‑support obligations (typically enforced via Qualified Domestic Relations Orders, or QDROs) can reach retirement benefits despite ERISA protection. QDROs are a recognized exception under ERISA procedures.

California specifics — AB 2837 and state exemptions vs. bankruptcy

California is an "opt‑out" state for bankruptcy exemptions: debtors who live in California generally must use California exemption law rather than the federal exemption list. That said, Congress created a narrow, federal retirement exemption that applies regardless of a state’s opt‑out status for many retirement funds under 11 U.S.C. §522(b)(3)(C).

In 2024 California enacted AB 2837 (chaptered September 24, 2024), which amended Code of Civil Procedure §704.115 and related enforcement provisions; most changes became effective January 1, 2025. AB 2837 applies to enforcement of state judgments (collection/garnishment) and revises how "tax‑qualified" retirement funds and distributions are treated in state court enforcement proceedings — notably by applying the statute’s "necessity for support" (means‑type) analysis to a broader set of tax‑qualified plans and some distributions. In short: tax‑qualified employer plans that previously enjoyed broader protection from judgment enforcement in state court may now be subject to a court determination about what amount is reasonably necessary for retirement support.

Crucial distinction: AB 2837 affects state court judgment enforcement, not federal bankruptcy law. A California creditor attempting to seize retirement funds outside bankruptcy may have new tools under state procedure, but federal bankruptcy protections (ERISA exclusion, federal IRA exemptions and rollover rules) remain operative when a bankruptcy is filed — meaning bankruptcy can still be the stronger shield for many debtors. Consult counsel before relying on state exemption outcomes.

Means test, pension income, and practical planning tips

How retirement income and contributions affect the bankruptcy means test and Chapter 13 budgeting is a common concern:

• Current monthly income / means test: The means test focuses on your recent income (generally the six months before filing) and uses specified categories on Form B22A/B22C. Pension and retirement income may be counted as "current monthly income" in many cases; Social Security benefits are typically excluded from the means‑test calculation. Local rulings vary, so courts may treat retirement receipts and distributions differently depending on facts and how funds were received.
• Chapter 13 disposable income: Even if an account is exempt, distributions or ongoing retirement receipts can increase the income available for a Chapter 13 plan. Courts have generally held that exempt status of an asset does not automatically exclude it from income calculations when determining a debtor’s ability to pay.

Practical planning tips (do these only with competent counsel):

1. Keep funds inside qualified plans — avoid unnecessary distributions before filing; once distributed, protection may be lost. If you need to move money, prefer direct trustee‑to‑trustee rollovers and preserve documentation.
2. Document rollovers and trace sources — if you rely on the unlimited rollover protection for amounts traceable to ERISA plans, keep 1099‑R, 5498s, trustee statements, and plan documents. Proper tracing is often decisive.
3. Watch timing — large contributions or transfers close to filing can draw trustee scrutiny (fraudulent transfer rules) and may be reversed or disallowed. Avoid last‑minute planning without attorney review.
4. Consider bankruptcy early if collection threats target retirement — AB 2837 strengthened state‑court collection tools; federal bankruptcy may offer broader protection for qualified plans and distributions. Discuss the tradeoffs (Chapter 7 vs Chapter 13) with counsel.
5. Know the exceptions — federal tax levies, QDROs for family support, and criminal/civil judgments tied to plan fiduciary breaches can reach retirement assets. Confirm the nature of your plan (ERISA vs non‑ERISA, solo‑401(k), SEP, SIMPLE, governmental plan) before relying on a blanket rule.

When in doubt, retain a bankruptcy attorney experienced with retirement‑asset issues and California exemption law. Small factual differences — plan documents, source of funds, timing of distributions, and whether an account is an "inherited IRA" — materially affect the result.

Resources & next steps

• Read the AB 2837 legislative text and §704.115 (California Code of Civil Procedure) for the exact statutory language before relying on state enforcement outcomes.
• Check the Judicial Conference / federal adjustments for the current IRA cap effective dates (last adjustment effective Apr. 1, 2025).
• Ask your plan administrator for plan documents and QDRO procedures; keep rollover and distribution records (1099‑R, 5498) in case you file bankruptcy.

Need personalized advice? If you are in or near Los Angeles and facing collection attempts or contemplating bankruptcy, contact a local bankruptcy attorney to review plan documents, evaluate AB 2837 exposure, and plan the safest timing and structure for any transfers. The interaction of federal bankruptcy law, ERISA, and California judgment enforcement is nuanced — professional advice is essential.