How protected is an IRA?

[albedo]

I have an ‘orphaned’ 403b account with Vanguard that I’m considering rolling over into a traditional IRA. Among the benefits of doing this are qualification for Admiral shares and tax benefits of a ROTH conversion next year.

My only concern is that I’ve read that IRAs are not as safe as ERISA accounts are from litigation. The only legal decision I know of is Rousey v. Jacoway (03-1407) 544 U.S. 320 (2005) ), which deals with retirement accounts in a bankruptcy case. How vulnerable are IRAs to legal liability in cases other than bankruptcy?

I recall a previous post that suggested that regulations vary by state, but I haven’t seen any specifics. I’ll be grateful for any enlightenment or direction to other threads I may have missed.

Thanks

[Sam I Am]

You might find the info in the link below useful. The protection of IRAs is outlined on a state by state basis.

Scroll down about half way through the discussion, and you can see what protection your state gives to IRAs

http://www.journalofaccountancy.com/Issues/2006/Jan/ProtectRetirementAssets

Sam I Am

[Default User BR]

My only concern is that I’ve read that IRAs are not as safe as ERISA accounts are from litigation.

That varies by state.

http://www.assetprotectionbook.com/state_resources.htm



Brian

[bmb]

Maybe not so simple. According to one legal web site cited above:
"One of the biggest problems with the state exemptions is in knowing which state's exemptions will apply. For instance, if a debtor living in a state that protects IRAs has their IRA account in a state that does not protect IRAs (or in a brokerage firm with nationwide offices), then the IRA might not be protected. Because of these conflict of laws issues, exemption planning can be very difficult and is fraught with many landmines that might allow a creditor to collect in a situation where the debtor was believed to be protected."

[albedo]

Thanks to all for the interesting replies. The links were very helpful.

The bottom line is that state laws have precedence, as stated in the Journal of Accountancy link:

“TRADITIONAL AND ROTH IRAs are not ERISA pension plans. They are protected in nonbankruptcy proceedings by any state laws specifically protecting IRAs since such state laws are not preempted by ERISA.”

And as stated further:

“THE CURRENT STATE OF PROTECTIONS
Qualified retirement plans and IRAs are protected under the new bankruptcy legislation. Outside of bankruptcy, ERISA provides nearly unlimited antialienation protection to qualified retirement plans (pensions, profit-sharing and 401(k) plans). State law generally protects traditional and Roth IRAs. SEP and SIMPLE IRAs and owner-only plans, however, require additional planning to insulate them from creditor claims.”

As bmb suggests, there appears not to be a simple answer, however, since statutes vary considerably around the country. It’s interesting that ROTH accounts do not fare as well as traditional accounts, overall. It would be nice to see some national uniformity but for now, it’s a matter of where you live and how vulnerable you are to legal liability.

So, residing in one (GA) of the six (CA, GA, ME, SC, SD, WY) states where neither traditional nor ROTH IRAs are considered as “exempt property” in litigation, I’m thinking I’ll leave my 403b assets in the orphanage until we eventually find a foster home in a more ‘enlightened’ state!

[bobbyrx]

Most of these very useful links refer to protection from bankruptcy but how does this overlap with protection from creditors without bankruptcy as an exempt asset as a result of litigation? Is an rollover IRA protected from creditors up to $1 million as a result of Federal legislation that supercedes individual State law? I think there is but I am not sure- anyone?

[tetractys]

Googling "IRA protection" brings up a whole bunch of stuff.

Check it out. -- Tet

[kaneohe]

Most of these very useful links refer to protection from bankruptcy but how does this overlap with protection from creditors without bankruptcy as an exempt asset as a result of litigation? Is an rollover IRA protected from creditors up to $1 million as a result of Federal legislation that supercedes individual State law? I think there is but I am not sure- anyone?

A few comments based on my understanding which could be wrong so appreciate any corrections:
1) I believe a rollover IRA from an ERISA qualified plan e.g. 401K has unlimited protection (but only in bankruptcy)
2) The $1M you mentioned is for a normal IRA not from a qualified plan (again only in bankruptcy)
3)I think when you have both state and Federal protections,
the stronger one prevails? (but note that not just the $$$ amount is involved but also whether you have to file bankruptcy or not.........having to file bankruptcy makes it a weaker protection than not having to).


Albedo....thanks for starting this thread on a topic near and dear to my heart. I have come to the same conclusion that you have since I also live in one of the big 6 states you mentioned......until someone convinces me otherwise. This seems to be a dusty corner eliciting yawns and confused looks when mentioned. I am especially surprised that similar reactions come from financial planners......well, maybe not since they gain nothing if you stay in the ERISA plan. Funny how the brain works (at least mine). I walked by this thread all day yesterday and never thought of opening it till today but would have jumped on it immediately if I had seen "creditor protection" instead of "safe".

[dbr]

I too have wandered around trying to reach a definitive conclusion on the subject as I live in a state without clear-cut non-bankruptcy protection of IRA's. It is easy to offer financial advice to roll 401K's to IRA's or to convert to Roth's but many offering such advice don't even know there is a question about the implications.

Even lawyers can be blase, as one I talked to came back with the question "How would you even have a judgment that worrisome against you and not be in bankruptcy?" I don't have an answer to that kind of question. I also don't have an answer to how well the issue is mooted by carrying appropriate umbrella insurance to protect against liabilities. Practicing lawyers won't generally discuss such issues when theoretical as opposed to actual cases in litigation.

[kaneohe]

One question I have is this: you have $$$ in a 401K so it's protected, safe from creditors. However, while it is there, protected from creditors, it also is protected from you.......that is, you can't spend it either. Only after it is withdrawn from the 401K can you use it. However once it leaves the 401K, it isn't protected anymore. Do creditors have only a limited period of time to get hold of your assets? If so, then you just keep everything in the 401K until that time is up. Or can they hang around forever and then pick off the funds as they come out of the 401K?

[albedo]

Kaneohe --Thanks for the tip on more descriptive phrasing of titles; the keyword “protection” would have been better, as you and tetractys both suggest. I’m sort of new around here and have much to learn. I hope other potential contributors aren’t also skipping over the thread.

I ran the google search suggested by tetractys. I haven’t read through the 7.5M hits yet (this obviously is a hot topic) but there appears to be a lot of relevant information out there, including many state-specific discussions. Here are a couple of excerpts, which reflect the legal uncertainties noted in dbr’s comments (they won't let me post web links yet, so I can only give the name of the site).

A forum on the lawguru website :
Q: (a resident of Texas) “Are IRA's protected from a lawsuit? This money was rolled over from a 401K and a teacher retirement lump sum. Can this money be taken from me. I'm 67, and not rich! This resulted from an automobile accident 2 years ago. All insurance has been used.”
A: (from an attorney) “Not if in the name of defendant only. I presume you have a lawyer if you had insurance. You could have sheltered your assets before any judgment. Most plaintiff lawyer's do not go after individuals after being paid ..and release individuals. Your case must be unique.”

And, from Mark Nestmann's blog:
“In a recent case, a Florida bankruptcy court ruled that creditors could seize all funds in two of an individual's IRAs, and $60,000 in a third. The first account became vulnerable when the IRA owner borrowed funds from his IRA and used the assets to pay off a mortgage. He then acquired the property and subsequently sold it. This was one of several prohibited transactions in the owner's account. As a result, the IRA was terminated and lost its exempt status. The second and third IRAs were terminated because they contained funds rolled over from the first IRA.”

So, lots of reading to do. I’m still planning to leave my 403b intact until I have a better understanding of these issues.

[bobbyrx]

From reading the various links, I have tentatively concluded that Federal law protects rollover IRAs from creditors in bankruptcy while many, but not all, states "opt-out" and protect rollover IRAs from creditors completely, not only in bankruptcy.
Am I correct?

[albedo]

Bobbyrx--The table at (http://www.assetprotectionbook.com/state_resources.htm) might support your conclusion, but I’m not sure if they’re considering only bankruptcy cases. The second column, “Exemption for Tax-Qualified Retirement Plans, IRAs & Roth IRAs,” shows that about 28 states unconditionally exempt qualified plans (green boxes), whereas the rest either do not at all or have various stipulations (some rather strict).

Footnote 2 reiterates what a thorny problem this is:
“Some states have adopted an exemption along the lines of "reasonably necessary for support". This means that the exemption will be determined by the courts on a case-by-case basis. Suffice it to say that there is a wide gulf between what the courts think is "reasonably necessary for support" and what most debtors think is "reasonably necessary for support" -- in most states, this exemption usually works out to less than $100,000 in practice. Finally, the determination of whether an IRA or retirement plan qualifies as such under state law is often very complicated where the state law looks to federal tax law.”

[kaneohe]

Kaneohe --Thanks for the tip on more descriptive phrasing of titles; the keyword “protection” would have been better, as you and tetractys both suggest. I’m sort of new around here and have much to learn. I hope other potential contributors aren’t also skipping over the thread.

I'm not sure how this board works but you might try editing your OP and see if you can change the title and see if it sticks.

[Taylor Larimore]

Hi Albedo:

Thanks for the tip on more descriptive phrasing of titles; the keyword “protection” would have been better, as you and tetractys both suggest.

At your suggestion, I used my moderator's ability to change "safe" to "protected" in the title of your opening post (OP).

[albedo]

Thanks very much, Kaneohe and Taylor. The thread feels more cogent already. Maybe we'll attract more contributors now.

[eurowizard]

Why dont you just pay the creditors the money you owe them out of your IRA/401k?

[southerndoc]

From what I'm reading, SEP's are ERISA pension plans, but as an IRA it doesn't receive antialienation privileges.

I'm trying to figure out if an individual 401(k) would provide more protection against creditors than a SEP-IRA. I'm a physician who lives in Georgia and practices in a high-risk occupation. Therefore, I'd like to keep my retirement plans as safe as possible.

Is there an added benefit of establishing a solo/individual 401(k) over a SEP?

[JW Nearly Retired]

From reading the various links, I have tentatively concluded that Federal law protects rollover IRAs from creditors in bankruptcy while many, but not all, states "opt-out" and protect rollover IRAs from creditors completely, not only in bankruptcy.
Am I correct?

I don't think so. Other than the Sam-I-am link, most of what I have found on this indicates rollovers have no more protection than other IRAs. For example see,
http://www.nytimes.com/2009/04/02/busin ... REDIT.html
JW

[DaveS]

Yikes what a lot of misinformation. "Exemptions" are things that are exempt from the judgments creditors might get against someone. Usually stuff exempt in bankruptcy is exempt out side of bankruptcy. In other words you can't take my homestead either in bankruptcy, or even if I don't file. Every state has it's own exemption laws and there are federal laws. Some like ERISA apply everywhere, some like the federal bankruptcy exemptions only apply where the state allows. Consideration was given to listing each states exemption laws in the Bogleheads Guide to Retirement Planning but these laws get amended with such frequency such a list would go out of date and become misleading in a hurry.

All ERISA retirement accounts are exempt under federal law everywhere - period, no exceptions. (Think 401k if the 401k is really a 401). IRA's are not ERISA retirement accounts. Whether they are exempt is going to turn on State exemption laws. That means there are 50 varieties and one federal bankruptcy law for places like Guam and states that don't opt out of the federal. The original poster did not say what state he/she was in. In Nevada you can take an IRA with $500,000 through a bankruptcy, or exempt that amount from a judgment, no questions asked. But you can't use federal bankruptcy exemptions. In states where you can use federal exemptions you can take an IRA through bankruptcy with one million in it. In New York you can take an IRA through a bankruptcy or a judgment creditor cant touch it as long as it's "reasonably necessary for the support of the debtor or a dependent" That means if your 64 and have no other retirement, a couple hundred thousand. If your 25 and healthy, nothing. NY does not allow the federal bankruptcy exemptions. Georgia the limit is $100,0000 and they wont allow the federal. Hipple 225 BR 808. Run "Your State" exemption laws' through a search engine and you get a list. Now for the bad news. IRA's ore not exempt from IRS levies anywhere. Dave

[southerndoc]

That's my problem with information available on the web: a lot of confusing answers. Some of the legal advice seems to contradict itself as well.

The Hipple case seems to exempt SEP-IRA's and a lawyer I've talked to says most judges will interpret the Hipple case to exempt all IRA's in Georgia.

I'm thinking of opening up a solo 401(k), but unfortunately Vanguard does not allow me to roll a SEP-IRA into the 401(k). ERISA classifies it as a pension plan, but does not afford it the antialienation protection of traditional ERISA-covered plans. Therefore, the entire amount is open in regards to federal credit protection, but Hipple may (or may not) protect it.

[penolope]

I've done tons of research on this and even received emails from a lawyer that writes articles on this. Here's the scoop. Starting in October, 2005, since the BAPCPA was enacted, protection from creditors regarding retirement accounts has improved. Now, regardless of which state you live in, 401Ks and 401Ks that have been rolled over into IRAs (Rollover IRAs) have unlimited protection from creditors in bankruptcy. Traditional and Roth IRAs have protection up to $1 million. Even if your state uses state exemptions, you use this federal exception when it comes to retirement accounts. However, outside of bankruptcy, state laws determine whether or not they are protected. I live in GA and they have the worst protection and IRAs are not protected at all outside of bankruptcy. I know company sponsered 401Ks offer the best protection overall but I'm not positive if they are protected outside of bankruptcy in GA or not but I think they are. I printed numerous articles off the internet explaining all this but it is hard to find a lawyer that understands it. They all tell you something different. You need to call around til you find one that understands the changes in the bankruptcy laws since BAPCPA passed in 2005. If you Google "protection of retirement funds in bankruptcy" you'll see what I'm talking about. It took me forever to find. Now I'm trying to find a lawyer that understands the law before I put my bankruptcy in his/her hands.

[DaveS]

Penolope: I have been practicing bankruptcy law since the 1980's and I have been board certified. What you wrote above is not correct. Take a look at 11 USC 522(b)(2). It says you can take federal exemptions unless the state you have lived in (for 2 years) has opted out of the federal exemptions. California, Nevada and quite a few other states have opted out. Georgia is an opt out state. That means anything you have in the IRA above the state exemption of $100k, your going to loose it if you file. If you want to find a serious BK lawyer go to the trade ass'n www.nacba.org and search their list for one near you. Dave

[penolope]

Dave,

I just spent 40 minutes writing you a reply but it wouldn't let me send it since I'm a new poster. I had copied some stuff from a website for you to read because it was too long to type. I wish I had your email address so I could show you what I'm talking about. Anyways, part of it was an email from Richard Naegele who does seminars on this topic and he says the following:

"If the debtor is in bankruptcy, the state law does not apply and the IRA assets are protected against creditor claims. The IRA and retirement plan exemption from bankruptcy applies regardless of whether the debtor elects the federal or state bankruptcy exemptions. 11 USC section 522(d)(12). See also 11 USC section 522(b)(3)(C) which creates an exception to the "anti-stacking" clause of 522(b)(1) and provides that the federal bankruptcy exemption for retirement plan and IRA assets applies and such assets are exempt even if the debtor chooses the state law bankruptcy exemptions."

[Raabe34]

I have an ‘orphaned’ 403b account with Vanguard that I’m considering rolling over into a traditional IRA. Among the benefits of doing this are qualification for Admiral shares and tax benefits of a ROTH conversion next year.
Thanks

This is something no one else seems to have touched yet but your "orphaned 403b" is now covered by a plan document that may or may not allow for the withdrawal you are considering. Unless you reach a distributable event, money may have to stay in the plan.