Your IRA is protected in bankruptcy up to $1,512,350. That's the cap. Federal law. 11 U.S.C. §522(n) sets it.
Your neighbor's Solo 401(k)? No cap. None.
Same money. Same guy. Different lock on the door.
The Wrapper Switch
Look. An IRA lives under one section of the tax code. IRC §408. A Solo 401(k) lives under another. IRC §401(a). When you roll IRA money into a Solo 401(k), the dollars don't change. The legal wrapper changes.
Think of it like two rooms. Same furniture in both. But one room has a screen door. The other has a steel deadbolt. You picked up the couch. You carried it into the other room. You locked the steel door behind you. Right?
That's the rollover. That's the whole trick.
The Federal Deadbolt
The deadbolt has a name. ERISA's anti-alienation provision. 29 U.S.C. §1056(d)(1). ERISA is the federal law that protects retirement plan assets. It says: benefits in a qualified plan cannot be grabbed.
The Supreme Court ruled on this in Patterson v. Shumate, 1992. A guy went bankrupt. His creditors wanted his retirement plan. The Court said:
The anti-alienation provision of ERISA constitutes an enforceable transfer restriction under applicable nonbankruptcy law.
Translation: hands off. Federal law. No dollar limit. No state-by-state guessing.
Your IRA gets a cap. Your Solo 401(k) gets a wall. The wall has no top.
The Bonus Nobody Mentions
I mean, the same wrapper that gives you the creditor shield also shelters leveraged real estate.
An IRA that borrows money to buy a rental property pays a special tax on that borrowed income. A Solo 401(k) trust skips that tax. The code calls them "qualified organizations" and gives them a pass. Your Solo 401(k) trust counts. Your IRA doesn't.
Congress built this exemption in 1980 so the Teamsters pension fund could buy office towers with borrowed cash. The statute doesn't care that your plan has $87,000 in it. Same rule. The trust owns the building. Not you. The trust owes the mortgage. Not you.
Sure.
The Crack
Most Solo 401(k) promoters stop talking right about here.
Yates v. Hendon. Supreme Court, 2004. The question: does ERISA protect a plan that covers only the business owner? The Court wrote:
A working owner may qualify as a participant in a plan covered by ERISA. The plan must also cover one or more employees besides the owner.
Someone on payroll. That's the line.
If your Solo 401(k) covers only you, ERISA may not apply. The federal deadbolt disappears. Protection drops from a guaranteed federal wall to a coin flip that changes by circuit court. Some courts say the plan's code section alone is enough. Others say it isn't.
Promoters talk about the tax savings. Yates doesn't come up. The fortress has a crack in the foundation. One participant isn't enough.
The Fix
Your spouse works in the business. Part-time counts. She answers phones. He does the books. Whatever. They join the plan. Two participants. The plan now covers an owner and another person.
The Yates problem goes away. ERISA applies. The deadbolt holds.
Not every Solo 401(k) provider builds in spousal participation from day one. Some do. Some don't.
The Number Again
The IRA bankruptcy cap is $1,512,350. That's someone else's problem now. Your Solo 401(k) sits behind a federal wall with no top, no cap, no dollar limit.
But only because you added a second name to the plan. Because you know about a case from 2004 the guy selling you the rollover never mentioned.
The government wrote the rules. We're just reading the fine print.
