IRAs and Qualified Plans Offer Limited
Asset Protection
by Shane Flait (2009)
You can lose your assets to creditors
(whom you’ve borrowed from), to claims
under divorce or paternity suits, to
trumped-up claims against your deep
pockets, or to government for taxes
owed.
What you have in your IRA or other
qualified plan has some asset
protection. But federal and state laws
together determine when and how much
protection those assets actually have –
and from whom. That’s what this article
addresses.
Qualified plans protected
The Bankruptcy Abuse Protection and
Consumer Protection Act of 2005 (BABCPA)
established the protection limits for
various qualified plans:
-
SEP (Simplified Employee Pension)
IRAs, SIMPLE (Savings Incentive
Match Plan for Employees of Small
Employers) IRAs, and all
defined-benefit and
defined-contribution employer
retirement plans have unlimited
creditor protection in bankruptcy.
This includes 403(b), 457, and
governmental or church plans under
code section 414
-
Distributions from all
defined-benefit and
defined-contribution employer
retirement plans retain creditor
protection if they are rolled over
to an IRA
-
Traditional and Roth IRAs not
created from rollovers from
qualified plans are subject to
creditors but only to the extent
that these accounts exceed $1
million,
-
Employer retirement plan protection
(including SEP and SIMPLE IRAs, and
non-ERISA retirement plans such as
individual 401(k)s) now receive
unlimited creditor protection during
bankruptcy, regardless of ERISA.
Keep good records on all your rollovers
from qualified plans and roll them into
separate IRA accounts to maintain their
unlimited protection.
Note also that a qualified plan is not
considered an ERISA plan if it covers
only the business owner (owner-only
plans). Check your state law for how
these plans are protected.
Federal protection when and from whom
Unfortunately, this protection comes
into play under bankruptcy – a federal
process. The protection is from typical
creditors (i.e. those from whom you
borrowed money).
It doesn’t include protection from
qualified domestic relations orders
(where assets can be awarded to your
former spouse or other alternate payee).
Nor does it protect you from tax levies
from the IRS.
Where your state law plays its part
For all those legal actions not
involving bankruptcy, your state law
will determine how much protection your
qualified plan assets have. So check
what your state offers you for your
plan.
Two areas where state laws vary on
protection are:
-
plan withdrawals,
-
inherited plans to beneficiary
Most states will exempt all qualified
plan assets - but only while they’re in
the retirement account. Some other
states limit how much is exempt from
creditor actions. This amount may be
fixed – possibly at $500,000 – or only
limited to what is ‘reasonably
necessary’ to support the owner and his
or her dependents if a claim is lodged
against those assets.
Unfortunately, ‘reasonably necessary’ is
vague. It can depend on your age, other
holdings you have, and your obligations.
It’s up to a court and depends upon the
claim made against you. Vague
terminology such a ‘reasonably
necessary’ always invites lawsuits.
Because IRAs are vulnerable under state
laws, you may be worse off rolling your
company sponsored plan into your own IRA
for better control of your retirement
investments. Your state may offer much
less IRA protection against creditors
than it would your company plan.
Again, your state may not protect your
plan assets inherited by your
beneficiary from his creditors after you
die. Check with your state. You may want
to set up a trust as beneficiary of your
retirement account for better
protection. Of course it can benefit
those people you designate in the trust
document as beneficiaries.
Remember that the bottom line in
protecting assets successfully is
recognizing who you’re protecting them
from and then positioning those assets
accordingly – a task easier said than
done!
Shane Flait is a writer and educator.
See more at
www.EasyRetirementKnowHow.com
