creditor protection, 401k vs Roth/TIRA

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creditor protection, 401k vs Roth/TIRA

Postby johnnysk » Fri Feb 01, 2013 2:59 am

I apologize if this issue has been discussed before, but as I understand it, 401k is wholly protected from creditors/lawsuits, but traditional IRA/Roth IRAs are not? I've read that at the Federal level, in cases of bankruptcy, Roth and TIRA may be exempted up to 1 million, but this can vary from state to state, and, in fact, many only protect up to what is "reasonably necessary" to support the owner (whatever that means).

If this is true, I'd appreciate your thoughts regarding the specifics of the above (particularly the "reasonably necessary" part and if there have been cases involving this and how it unfolded), how one might protect these assets, and also, if/and how this relative vulnerability might influence your investment planning.
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Re: creditor protection, 401k vs Roth/TIRA

Postby gsmith » Fri Feb 01, 2013 3:29 am

There are a lot of finance articles that spell it out in laymen's terms, but I too was looking for a legal article to reference:
Through google, I found what appears to be a lawyer's guide on the topic:
http://www.shefskylaw.com/66BE91/assets/files/Documents/Retirement%20Plans%20and%20Creditor%20Protection11.pdf

http://www.law.cornell.edu/uscode/text/11/522
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Re: creditor protection, 401k vs Roth/TIRA

Postby dbr » Fri Feb 01, 2013 10:07 am

Be sure in researching this subject to realize that state law applies as well as federal law, and that there are many differences across states.

Also be aware that protection against claims not in bankruptcy is a different area from bankruptcy law. Any information you read that is obtained under the category of bankruptcy does not apply to other kinds of judgements. My little bit of research on the subject would suggest that the issue for 401K rollovers is liability against non-bankruptcy claims.

I should add that a comment I got from a lawyer that I asked about this was to the effect that if you were in that much trouble you would be bankrupt. I wonder if this suggests that a primary legal tactic in defending liability claims is to declare bankruptcy.
Last edited by dbr on Fri Feb 01, 2013 10:14 am, edited 1 time in total.
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Re: creditor protection, 401k vs Roth/TIRA

Postby dbr » Fri Feb 01, 2013 10:11 am

gsmith wrote:There are a lot of finance articles that spell it out in laymen's terms, but I too was looking for a legal article to reference:
Through google, I found what appears to be a lawyer's guide on the topic:
http://www.shefskylaw.com/66BE91/assets/files/Documents/Retirement%20Plans%20and%20Creditor%20Protection11.pdf

http://www.law.cornell.edu/uscode/text/11/522


The first article above is about bankruptcy and not about overall liability. This excerpt pertaining to Illinois is interesting, note the highlight:

"Since Illinois is an opt-out state for purposes of the Bankruptcy Abuse Prevention and Consumer Protection Act, its exemptions apply to a bankruptcy estate and not those under the BAPCPA. 735 ILCS 5/12-1201. The same exemptions also apply to a debtor in a non-bankruptcy context."
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