Roth IRA [and bankruptcy protections]

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vijayaxyz
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Joined: Sun Nov 25, 2012 10:27 am

Roth IRA [and bankruptcy protections]

Post by vijayaxyz »

Hi,

I have a Roth IRA, to which I contributed $2000 originally (20 years back). Also, I used the SAME Roth IRA account to rollover my Roth 401K money and After-tax 401K money from the prior employer. So, now, my Roth IRA has both direct contributions as well as my rollover money (from my previous employer). I have NOT done any Roth conversions (from traditional IRA or from any pre-tax 401K).

I have few questions. 1. Should the Roth money (from the employer) should have been rolled over to a DIFFERENT Roth IRA account, instead of to the Roth IRA account which had direct annual contributions? 2. If both are in the SAME Roth IRA account, for bankruptcy protection, which rule will be applied? i.e. I know that the Rollover moneys are protected without any limit, while the traditional/Roth IRAs are protected up-to $1.5M. In my example, which rule will be applied for my Roth IRA account (which has both regular contributions as well as the rollover).

Thanks,
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David Jay
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Re: Roth IRA [and bankruptcy protections]

Post by David Jay »

Liability regulations are state specific, so there is no universal answer to your questions.

In my state (Michigan) there is no difference in law between personal IRA balances and former ERISA assets. In other states (California comes to mind) there are differences between the handling of former ERISA assets and personal contributions to an IRA.
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lakpr
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Re: Roth IRA [and bankruptcy protections]

Post by lakpr »

Not a lawyer, but my layman reading is that once you mixed the contributory Roth IRA and Rollover Roth IRA, then the lesser standard -- that of contributory Roth IRA -- will take effect. *IF* there is a difference in the state treatment of the IRAs.

The $1.5 million you are talking about is probably coming from the BAPCPA (Bankruptcy Abuse Prevention and Consumer Protection Act) of 2005 -- inflation adjusted limit from the original limit of $1 million back then. To avail that protection, you actually need to file for bankruptcy. Interesting thing about that particular law is that it does NOT discriminate between Rollover IRAs, Roth IRAs, Traditional IRAs, SEP-IRAs, SIMPLE-IRAs, etc. An IRA is an IRA, period.

If you only get a judgment against you, and you are either reluctant to file for bankruptcy or if you do file for bankruptcy protection but the court determines that you have the means to satisfy the judgment, then the BAPCPA limits do not apply.

I will once again disclaim that this is not legal advice, I am not a lawyer, and only sharing my understanding of the law.
Alan S.
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Re: Roth IRA [and bankruptcy protections]

Post by Alan S. »

The inclination of a court to consider the source of funds in an IRA funded by both rollovers and regular contributions is usually not determinable. Perhaps they will, perhaps they won't and treat the entire balance as contributary, or perhaps it depends on the locality, the court, or the IRA owner's records.

Fortunately, most states fully protect IRAs in and out of bankruptcy, so BAPCPA would generally be a backup. There were a very few states that provide lesser protection for Roth IRAs than traditional. You should consider not only your current state, but perhaps states you may move to in the future.

The whole subject of creditor protection is more gray than black and white.
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