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As if it weren’t tough enough to set aside money for an IRA and invest in a fund that helps you meet your financial goals, IRAs can involve another risk. If you declare bankruptcy, the money set aside in an IRA could be vulnerable. To cope, make sure you know how IRA bankruptcy protection works long before a catastrophe occurs.

The basic rule of IRA bankruptcy protection

Along with all the other advantages of saving for retirement with an IRA, the money you contribute and even the company match is legally protected from creditors if you must file for bankruptcy.

This protection extends to all conventional IRAs, from traditional and Roth to rollovers. So even after your debts are discharged during bankruptcy proceedings, you’ll emerge with retirement funds in place. Self-employed people and small business owners also receive protection for their contributions to SEP and SIMPLE IRAs.

Limits and exclusions

IRA bankruptcy protection does come with a dollar limit, but it’s unlikely to affect the average IRA owner. The latest adjustment, in 2016, still allowed protections for amounts under $1,283,025. New adjustments are typically issued every three years.

But don’t confuse bankruptcy protections with other potential IRA asset seizures. If you’re not filing for bankruptcy, IRA assets aren’t protected from general creditors, IRS levies or divorce proceedings. Consult a tax advisor if your IRA might be at risk due to any of those impending situations.

Inherited IRAs can be seized by creditors in bankruptcy

If you inherited an IRA upon the owner’s death and anticipate filing for bankruptcy, beware. Unless you as the beneficiary are also the deceased account owner’s widow or widower, the IRA bankruptcy exemption does not apply to inherited IRA funds in most states.

There are ways around this. Some states have established bankruptcy exemptions that override the Supreme Court ruling on inherited IRAs not qualifying for bankruptcy protection, for example. And savvy IRA owners can work with estate attorneys on measures that will protect their future heirs from losing bankruptcy protection on an inherited IRA.