Does a Roth IRA Count as an Asset in Insolvency Calculation for Cancelled Debt?

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I keep tabs on the search terms that lead people to my website. Lately I’ve noticed searches asking something similar to the following: If I have money in a Roth IRA instead of a traditional IRA or 401(k) account, does that still count as an asset on the insolvency calculation with canceled debt?

As a reminder, canceled debt is often taxable, but one of the exceptions is if you can show you were insolvent, meaning your liabilities (debts) are more than your assets. I wrote about this subject in this post from 2013.

In the “asset” section of the insolvency worksheet, one of the questions asks about “interest in a retirement account.”


The short answer is, yes, amounts held in a Roth account count as an asset..

Any “interest in a retirement account” counts as an asset. Note that the term “interest” as used here means “stake” rather than literal “interest earned.” Simply stated: if you have $10,000 in a retirement account, it counts as a $10,000 asset.

Roth Strategy in Canceled Debt

One of the things that may be leading people to search about whether or not Roth IRAs count toward insolvency calculations is because of a strategy I’ve seen advocated on some message-board-type websites.

The strategy involves planning for debt cancellation by reducing your assets. For example, if you have $10,000 in a traditional IRA, and you know there’s a debt cancellation looming, do a Roth conversion and have taxes withheld (since the conversion is taxable).

Say you have 20% withheld for taxes (so $2,000). That leaves $8,000 going into the Roth account, thus reducing your assets by $2,000 for the insolvency calculation.

I do think this is a possible strategy, but … in my experience, most people with canceled debt find that the cancellation comes out of left field, thus making it almost impossible to do this type of advance planning.