IRAs seem to offer very little asset protection in some states

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collected
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IRAs seem to offer very little asset protection in some states

Post by collected » Sat Oct 24, 2015 2:36 am

I've been doing a lot of research recently on whether or not an IRA provides just as much asset protection than a 401k. Apparently IRAs provide almost no asset protection at all in some states. A lot of articles mention that the "Bankruptcy Abuse Prevention and Consumer Protection Act of 2005" provides over 1 million in protection to IRAs but it's a federal bankruptcy exemption. Most states have opted outof being able to use federal exemptions for a bankruptcy with means that you probably do NOT have that 1 million protection. It's really surprising that there seems to be conflicting and wrong information on this important topic.

One of the last options left for real asset protection would be a 401k with multiple participants in CA. It's not good enough because you only get to put in $18,000 or so a year. Anyone know if I'm correct on this?

So confused on this. I've just read that IRAs are protected up to 1.2mil on here:
http://www.nolo.com/legal-encyclopedia/ ... ssets.html

But it mentions a federal bankruptcy exemption in a state that doesn't allow them! The same article even states that CA doesn't allow federal bankruptcy exemptions. Even articles on this issue are wrong and can't be relied upon.

It says under 704.115. http://www.leginfo.ca.gov/cgi-bin/displ ... 10-704.210
(a) are exempt only to the extent necessary to provide
for the support of the judgment debtor when the judgment debtor
retires and for the support of the spouse and dependents of the
judgment debtor, taking into account all resources that are likely to
be available for the support of the judgment debtor when the
judgment debtor retires. In determining the amount to be exempt under
this subdivision, the court shall allow the judgment debtor such
additional amount as is necessary to pay any federal and state income
taxes payable as a result of the applying of an amount described in
paragraph (3) of subdivision (a) to the satisfaction of the money
judgment.
I just read a court case where a guy had a family with kids and near retirement age was hit with a multi-million dollar judgement where he wouldn't be able to even pay off the interest in his lifetime if he tried. They took his entire IRA except $1,500 to pay taxes. IRAs seem to offer ZERO protection in some states.
Last edited by collected on Sun Oct 25, 2015 4:53 am, edited 1 time in total.

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LadyGeek
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Re: IRAs seem to offer very little asset protection

Post by LadyGeek » Sat Oct 24, 2015 10:34 am

Welcome! I assume you are asking as it relates to your personal situation.

The wiki has some background info: Asset protection (Investing in an IRA)

Have you considered protection under a QDRO (qualified domestic relations order)?

BTW, I fixed your link to the Nolo article.
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Re: IRAs seem to offer very little asset protection

Post by Castanea_d. » Sat Oct 24, 2015 10:51 am

So far as I know, that is in general correct: depending on the state, IRAs are probably subject to the claims of creditors to some degree (perhaps a large degree, depending on the state). Under federal law, 401(k), 403(b) and similar plans are not, and that can be a reason to avoid doing a rollover from a 401(k) to an IRA. The main exception to this protection would be a federal tax lien, which can be made against a 401(k).

In some states, a roll-over IRA that has come from a 401(k) or similar retains its immunity from claims, so long as the funds are not co-mingled with an IRA that was established in the normal way (by individual contributions).

I don't know anything about the specifics for California; it sounds like you have been doing a good bit of research on that. It might be worth paying to have a little chat with a lawyer who is experienced in this area and knows the state laws.

And, as Lady Geek just said, the Wiki is a good place to look. I just now looked at the article she suggested, and it has a number of good ideas to consider.

[Edited to fix a statement I made that was wrong; thank you to the person who sent a PM to tell me so. This is one of the things I love about Bogleheads -- if you make a mistake, someone will correct you. The information ends up being more accurate, and you learn something you didn't know -- or even more important, you learn that something you thought you knew was wrong!]

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Re: IRAs seem to offer very little asset protection

Post by Alan S. » Sat Oct 24, 2015 4:29 pm

a majority of states provide complete creditor protection for owned IRA (but probably not inherited IRA) accounts. Complete protection means that you do not have to file bankruptcy to protect your IRA because IRAs are exempt. Therefore, the posted title line is valid in CA and a few other states, but not generally across the US.

CA is regarded as among the weakest states relating to IRA creditor protection, as the statutes limit the protected amount to the amount needed to fund a basic living standard. Some experts believe that on average you might have 100k of protection.

The 2005 Federal BK Act provides inflation adjusted limits for cases when the state has not opted out of relative portions of the law. This creates the most confusion because some states opt out of a portion of the law, but not the entire law. For states where the law applies and the taxpayer files bankruptcy, the inflation protection has grown to around 1.25 mm. However, for rollover (aka conduit) IRAs which hold NO regular IRA contributions, there is no dollar limit on those IRAs. That is why it is recommended in those states to keep your rollover IRA accounts separate from your other IRA accounts. Further, even in states with complete protection under state law, you might move out of that state to a state with limited protection OR the statutes could be changed.

That said, these generalizations should not be substituted for all states. The state statutes should be consulted. Here is a well regarded asset protection resource: http://www.assetprotectionsociety.org/s ... tion-laws/

Finally, both qualified trusts and IRA accounts remain vulnerable to IRS liens and marital settlements.

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Re: IRAs seem to offer very little asset protection

Post by Coles » Sun Oct 25, 2015 3:52 am

LadyGeek wrote:Have you considered protection under a QDRO (qualified domestic relations order)?
Classic :oops:

Topic Author
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Re: IRAs seem to offer very little asset protection in some states

Post by collected » Sun Oct 25, 2015 5:21 am

There might be a way after all at least in CA through the use of a CA private retirement plan. Huge downside is that there are no tax breaks. They have to be used strictly for retirement purposes otherwise the protection is lost. I even think it can be moved over to an IRA and the IRA will be just as protected as long as the funds aren't commingled with a contributory IRA.

http://www.leginfo.ca.gov/cgi-bin/displ ... 10-704.210
704.115. (a) As used in this section, "private retirement plan"
means:
(1) Private retirement plans, including, but not limited to, union
retirement plans.
(2) Profit-sharing plans designed and used for retirement
purposes.
(3) Self-employed retirement plans and individual retirement
annuities or accounts provided for in the Internal Revenue Code of
1986, as amended, including individual retirement accounts qualified
under Section 408 or 408A of that code, to the extent the amounts
held in the plans, annuities, or accounts do not exceed the maximum
amounts exempt from federal income taxation under that code.
(b) All amounts held, controlled, or in process of distribution by
a private retirement plan, for the payment of benefits as an
annuity, pension, retirement allowance, disability payment, or death
benefit from a private retirement plan are exempt.

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Re: IRAs seem to offer very little asset protection in some states

Post by Alan S. » Sun Oct 25, 2015 5:59 pm

Note paragraph e) of the same section which drastically limits any exemption stated in b):
(e) Notwithstanding subdivisions (b) and (d), except as provided
in subdivision (f), the amounts described in paragraph (3) of
subdivision (a) are exempt only to the extent necessary to provide
for the support of the judgment debtor when the judgment debtor
retires and for the support of the spouse and dependents of the
judgment debtor, taking into account all resources that are likely to
be available for the support of the judgment debtor when the
judgment debtor retires. In determining the amount to be exempt under
this subdivision, the court shall allow the judgment debtor such
additional amount as is necessary to pay any federal and state income
taxes payable as a result of the applying of an amount described in
paragraph (3) of subdivision (a) to the satisfaction of the money
judgment.

Topic Author
collected
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Re: IRAs seem to offer very little asset protection in some states

Post by collected » Mon Oct 26, 2015 1:41 am

Alan S. wrote:Note paragraph e) of the same section which drastically limits any exemption stated in b):
It is quite confusing. I read it a couple times thinking that you were right until I spotted something.

In that quote it says:
...the amounts described in paragraph (3) of
subdivision (a)
are exempt only to the extent necessary to provide
for the support of the judgment debtor when the judgment debtor
retires...
As you can see. It ONLY applies to paragraph 3 of subdivision (a). which is basically IRAs and such (outlined in the Internal Revenue Code of 1986). I believe that the "CA Private Retirement Plan" is in paragraph 1 of subdivision (a).

Paragraph 3 of subdivision (a):
(3) Self-employed retirement plans and individual retirement
annuities or accounts provided for in the Internal Revenue Code of
1986, as amended, including individual retirement accounts qualified
under Section 408 or 408A of that code, to the extent the amounts
held in the plans, annuities, or accounts do not exceed the maximum
amounts exempt from federal income taxation under that code.
Important to note that overfunding retirement plans (so to remove the tax benefits) can also remove protection. Of course if someone actually does this they should get the advice of a lawyer. In the court case of Lloyd Myles Rucker they looked at how much salary he had (not distributions) and how much he was putting in retirement plans. Too much money was being put in the plans so it was determined that he was trying to shield assets. So I'm guessing that a somewhat small portion of a salary would go to a CA private retirement plan and it would be periodic and not lump sums.

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Re: IRAs seem to offer very little asset protection in some states

Post by denovo » Mon Oct 26, 2015 2:14 am

Umbrella insurance is nice asset protection.
"Don't trust everything you read on the Internet"- Abraham Lincoln

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David Jay
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Re: IRAs seem to offer very little asset protection in some states

Post by David Jay » Mon Oct 26, 2015 5:41 am

I see that in Michigan, all ERISA products are exempt according to the linked page.

So throw all assets in my Roth!
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Re: IRAs seem to offer very little asset protection

Post by guapomole » Mon Oct 26, 2015 2:58 pm

Coles wrote:
LadyGeek wrote:Have you considered protection under a QDRO (qualified domestic relations order)?
Classic :oops:
As in...get divorced and have a judge give half your retirement account to the former spouse so the creditors can't take it instead? That actually won't work either because QDROs are for employer sponsored plans only, not IRAs. In an IRA it's called a Transfer Incident to Divorce.

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Re: IRAs seem to offer very little asset protection in some states

Post by Phineas J. Whoopee » Mon Oct 26, 2015 3:02 pm

David Jay wrote:I see that in Michigan, all ERISA products are exempt according to the linked page.

So throw all assets in my Roth!
Roth IRAs are usually not covered under ERISA.
PJW

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Re: IRAs seem to offer very little asset protection

Post by LadyGeek » Mon Oct 26, 2015 3:31 pm

guapomole wrote:
Coles wrote:
LadyGeek wrote:Have you considered protection under a QDRO (qualified domestic relations order)?
Classic :oops:
As in...get divorced and have a judge give half your retirement account to the former spouse so the creditors can't take it instead? That actually won't work either because QDROs are for employer sponsored plans only, not IRAs. In an IRA it's called a Transfer Incident to Divorce.
As in... the sections of law quoted earlier did not cover QDRO, which is an important consideration - regardless of which side of the fence you are on.

Can someone please clarify the protection of employer sponsored plans vs. IRAs? The IRS is not clear: Retirement Topics - QDRO - Qualified Domestic Relations Order

IRS publication 590-A describes Transfers Incident To Divorce, but only from a tax perspective. Where is the legal protection stated?
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Re: IRAs seem to offer very little asset protection

Post by guapomole » Mon Oct 26, 2015 5:49 pm

LadyGeek wrote:As in... the sections of law quoted earlier did not cover QDRO, which is an important consideration - regardless of which side of the fence you are on.

Can someone please clarify the protection of employer sponsored plans vs. IRAs? The IRS is not clear: Retirement Topics - QDRO - Qualified Domestic Relations Order

IRS publication 590-A describes Transfers Incident To Divorce, but only from a tax perspective. Where is the legal protection stated?
Whether received by QDRO from an employer sponsored plan or Transfer Incident Due to Divorce from an IRA, once the funds have been transferred to the spouse they are treated as if they had been there's from day 1, therefore subject to the same creditor protection or lack thereof at the state and federal level.

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Re: IRAs seem to offer very little asset protection in some states

Post by sawhorse » Mon Oct 26, 2015 7:07 pm

Here are the general rules for employee individual bankruptcy (as opposed to employer bankruptcy). These rules do not apply to inherited accounts, money previously withdrawn from the accounts, and certain types of debts such as money owed to the IRS.

Employer retirement accounts have complete federally mandated protection (except for the situations listed in the first paragraph) from bankruptcy. SEP and SIMPLE IRAs are employer plans, so they have the same protection.

Individual IRAs have federally mandated protection up to around $1 million; the exact amount changes based on inflation.

Some states are opt-out states which means that they have a different set of rules for bankruptcy protection. In these states, you can choose to use either the state mandated protection or the federally mandated protection. If state protection is less than federal protection, you can still apply the federal rules. In practice this means that no matter your state, you can have at least the federal amount protected. There may be circumstances in which it's better to apply the state IRA protection even if the protection is less than federal because doing so will allow you to protect a non-IRA asset that is protected under state law but not federal law. PLEASE SEE SUBSEQUENT POSTS.

For individual legal matters other than bankruptcy, there is a bit less protection. There is no federal protection for child support, alimony, and criminal judgments, and some other things. Some states might provide protection.

Other than the cases listed in the previous paragraph, there is federally mandated protection for 401ks, private non religious 403bs, and TSP. There is no federally mandated protection for other retirement plans such as state/municipal 403bs , IRAs, Keough plans, etc. Some private religious 403bs have federal protection, others don't; you'll need to check the plan documents.

As an example, if you have a 401k, a 403b from a state employer, and an IRA, and you get sued for personal injury not resulting from a criminal act, under federal rules they can take your 403b and IRA but not your 401k.

In practice, many states offer greater protection against civil lawsuits than is required under federal law. Many states protect all your IRA, but some states don't. They may offer partial protection, only protect contributions made before a certain date, or not at all. There are even a few states that have different rules for traditional vs Roth IRAs.
Last edited by sawhorse on Tue Oct 27, 2015 10:15 pm, edited 1 time in total.

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Re: IRAs seem to offer very little asset protection

Post by SrGrumpy » Mon Oct 26, 2015 7:24 pm

Castanea_d. wrote:
In some states, a roll-over IRA that has come from a 401(k) or similar retains its immunity from claims, so long as the funds are not co-mingled with an IRA that was established in the normal way (by individual contributions).
I believe this applies in California, though it has not been tested vigorously in the courts yet.

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Re: IRAs seem to offer very little asset protection in some states

Post by collected » Tue Oct 27, 2015 2:53 am

sawhorse wrote:Here are the general rules for employee individual bankruptcy (as opposed to employer bankruptcy). These rules do not apply to inherited accounts, money previously withdrawn from the accounts, and certain types of debts such as money owed to the IRS.

Employer retirement accounts have complete federally mandated protection (except for the situations listed in the first paragraph) from bankruptcy. SEP and SIMPLE IRAs are employer plans, so they have the same protection.

Individual IRAs have federally mandated protection up to around $1 million; the exact amount changes based on inflation.

Some states are opt-out states which means that they have a different set of rules for bankruptcy protection. In these states, you can choose to use either the state mandated protection or the federally mandated protection. If state protection is less than federal protection, you can still apply the federal rules. In practice this means that no matter your state, you can have at least the federal amount protected. There may be circumstances in which it's better to apply the state IRA protection even if the protection is less than federal because doing so will allow you to protect a non-IRA asset that is protected under state law but not federal law.
I have to disagree with this. For example in CA there are very few federal exemptions you can use when you go bankrupt. California exemptions MUST be used unless the debtor has not resided in CA for at least 2 years. If you look at 11 U.S.C. § 522(b)(2) a state CAN opt out of federal exemptions.

This court case clearly outlines this.
Generally, a debtor has
the right to elect either state or federal exemptions. See 11 U.S.C. § 522(b)(2). However, any state
may, by appropriate legislation, opt out of the federal exemption scheme, thereby granting to debtors
only those exemptions expressly allowed by the law of that state. See id. Florida is such an opt-out
state. See FLA. STAT. ANN. § 222.20 (West, Westlaw through Chapter 316 and S.J.R. No. 2788
(End) of the 2006 Second Regular Session of the Nineteenth Legislature). The Trustee objected to
the debtor’s use of the federal exemptions, claiming that, because Florida is an opt-out state, the
federal exemptions were not available to the Debtor. See 11 U.S.C. § 522(b)(2)

...
the Court holds that a non-Florida-resident debtor, forced into using Florida exemption law by section 522(b)(3)(A), may elect to use the federal exemptions under section 522(b)(2), because Florida’s opt-out law does not bar non-residents from claiming federal exemptions.
Most states have opted out and can opt out anytime which could retroactively make an IRA vulnerable. This wikipedia article on the BAPCPA also mentions that states could opt out. The above court case shows that there might be loopholes depending on the state statute.

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Re: IRAs seem to offer very little asset protection in some states

Post by sawhorse » Tue Oct 27, 2015 3:49 pm

collected wrote:
sawhorse wrote:Here are the general rules for employee individual bankruptcy (as opposed to employer bankruptcy). These rules do not apply to inherited accounts, money previously withdrawn from the accounts, and certain types of debts such as money owed to the IRS.

Employer retirement accounts have complete federally mandated protection (except for the situations listed in the first paragraph) from bankruptcy. SEP and SIMPLE IRAs are employer plans, so they have the same protection.

Individual IRAs have federally mandated protection up to around $1 million; the exact amount changes based on inflation.

Some states are opt-out states which means that they have a different set of rules for bankruptcy protection. In these states, you can choose to use either the state mandated protection or the federally mandated protection. If state protection is less than federal protection, you can still apply the federal rules. In practice this means that no matter your state, you can have at least the federal amount protected. There may be circumstances in which it's better to apply the state IRA protection even if the protection is less than federal because doing so will allow you to protect a non-IRA asset that is protected under state law but not federal law.
I have to disagree with this. For example in CA there are very few federal exemptions you can use when you go bankrupt. California exemptions MUST be used unless the debtor has not resided in CA for at least 2 years. If you look at 11 U.S.C. § 522(b)(2) a state CAN opt out of federal exemptions.

This court case clearly outlines this.
Generally, a debtor has
the right to elect either state or federal exemptions. See 11 U.S.C. § 522(b)(2). However, any state
may, by appropriate legislation, opt out of the federal exemption scheme, thereby granting to debtors
only those exemptions expressly allowed by the law of that state. See id. Florida is such an opt-out
state. See FLA. STAT. ANN. § 222.20 (West, Westlaw through Chapter 316 and S.J.R. No. 2788
(End) of the 2006 Second Regular Session of the Nineteenth Legislature). The Trustee objected to
the debtor’s use of the federal exemptions, claiming that, because Florida is an opt-out state, the
federal exemptions were not available to the Debtor. See 11 U.S.C. § 522(b)(2)

...
the Court holds that a non-Florida-resident debtor, forced into using Florida exemption law by section 522(b)(3)(A), may elect to use the federal exemptions under section 522(b)(2), because Florida’s opt-out law does not bar non-residents from claiming federal exemptions.
Most states have opted out and can opt out anytime which could retroactively make an IRA vulnerable. This wikipedia article on the BAPCPA also mentions that states could opt out. The above court case shows that there might be loopholes depending on the state statute.
Thank you collected. There seems to be some uncertainty. Here is the source I used. See slide 11.
http://c.ymcdn.com/sites/www.nipa.org/r ... ele_2s.pdf

Topic Author
collected
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Re: IRAs seem to offer very little asset protection in some states

Post by collected » Tue Oct 27, 2015 10:05 pm

sawhorse wrote: Thank you collected. There seems to be some uncertainty. Here is the source I used. See slide 11.
http://c.ymcdn.com/sites/www.nipa.org/r ... ele_2s.pdf
You have to take everything into context.

This webpage provides an overview of that specific case in page 11. It appears that it has to do with an inherited IRA.
Trustee argued that because Debtors had claimed the Inherited IRA exempt under A.R.S. § 33-1126(B), that was the applicable statute here, not § 522(b)(3)(C)
VI. CONCLUSION
We conclude that funds in an inherited IRA are exempt under § 522(b)(3)(C), subject to any applicable dollar limitation set forth in § 522(n). Therefore, the bankruptcy court did not err when it overruled Trustee's second amended objection and allowed Debtors' claimed exemption for the Inherited IRA under § 522(b)(3)(C). We AFFIRM.
Literally every law group/attorney website I've been to says that states can opt out and if they do you cannot use federal exemptions. Here is one for example.
Under the Bankruptcy Code, debtors may choose between the federal exemptions listed in 11 U.S.C. § 522(d) or exemptions available under state law, unless their state has "opted out" of the federal exemption scheme.
Even worse is that even inherited IRAs are not exempt under a recent supreme court ruling. Clark v. Rameker, 134 S.Ct. 2242 (2014).

http://www.nolo.com/legal-encyclopedia/ ... itors.html

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