Jun 13, 2014 Retirement Planning

Is My Retirement Account Protected?

This question was posed at our recent seminar and the answer may depend on one’s definition of “protection”.

Under the Federal Bankruptcy Abuse Protection and Consumer Protection Act enacted in 2005, your Traditional or Roth IRA is protected in bankruptcy from creditors for up to $ 1,000,000.1  If you have assets in a qualified ERISA plan, such as 401(k) but excluding Solo 401(k) , deferred compensation or profit sharing, they have unlimited protection from creditors.2

In addition, the million dollar threshold in Traditional IRA accounts does not include rollover assets from qualified plans, so it could have even more protection than $ 1,000,000.  Many IRAs are

a combination of one’s contributions, earnings and rollover assets.  For example, if your IRA balance is $ 1,500,000 and is comprised of $ 1,000,000 in contributions and earnings and a $ 500,000 rollover, the entire account is protected in bankruptcy from creditors.

If a portion of your retirement assets have gone through a rollover, it is a good practice to keep documentation of the transaction.  It is interesting to note that there are no court rulings on this topic of rollovers being included or excluded from protection.

Of course, there are exceptions to the law and we note two: The first is for any tax lien imposed by the IRS. The second exception is for an embezzlement judgment or fiduciary breach against administrators of employer-sponsored plans.3

Prior to this 2005 law, IRA protection was determined by each individual state.  However, the Supreme Court ruled unanimously that IRAs (again, up to $ 1,000,000) should have the same protection as Social Security, pensions, and qualified plans under federal bankruptcy law.4

Beyond bankruptcy, state law determines any protection you may have against creditors. In Pennsylvania, IRAs are protected up to the million dollar mark. However, this excludes contributions made in the last 12 months (excluding rollovers), contributions in excess of $ 15,000 in any one year period or any contributions deemed to be fraudulent conveyances.5

It is also important to note the protection may not apply to Inherited IRA accounts. For example, a Florida court ruled that Inherited IRAs are not exempt from creditor claims.  Thus, please give careful consideration of beneficiary designations on all your accounts. You may want to review state law where they live.  Our legal system seems to have mixed opinions on this topic, as some courts have ruled the Inherited IRAs are exempt and some have ruled they are not.

This is not to suggest that assets should be left in 401(k) plans due to the unlimited protection in them.  When compared to 401(k) plans, IRAs typically offer clients a wider range of investment options, multiple fund managers, lower fees and easier access to funds.

Most of our discussion has focused on protection from bankruptcy.  However, you should definitely be aware of personal liability or business claims that could be made against you and substantially impact your retirement.  This is one of the many reasons we recommend umbrella liability coverage to our clients.

Even though your homeowner’s policy provides some level of liability protection, it is unlikely that you have as much protection as you need!  We strongly recommend discussing additional liability protection through the umbrella policy rider with your property casualty insurer.

If you are a small business owner, you may also want to explore professional malpractice insurance for many of the same reasons an individual chooses umbrella coverage.  Additional protection for a relatively inexpensive cost is a smart way to protect your family and assets.

Stay tuned, we will have a closer look at personal liability issues in an upcoming blog…

 

FOOTNOTES:

  1. http://www.jdsupra.com/legalnews/is-your-ira-safe-from-creditors-68064/
  2. http://www.nolo.com/legal-encyclopedia/can-judgment-creditors-go-after-my-retirement-a…
  3. http://online.wsj.com/news/articles/SB124181801239401917
  4. https://www.trustetc.com/resources/education/articles/supreme-court-ruling
  5. http://www.selfdirectediraexperts.com/wp/asset-creditor-protection-for-your-self-directed-ira/
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