Talk To Clients About Protecting Their Retirement Planaccounts
Lawmakers at the federal and state levels recognize how important retirement plans are to the financial security of Americans and have, therefore, granted retirement plan assets many types of special treatmentincluding protection from creditors. ERISA-qualified plans are mostly safe from seizure, with limited exceptions. In cases of bankruptcy, IRAs funded exclusively with qualified rollover money and certain other IRA assets up to a specified dollar limit are also shielded from creditors. State laws may also offer some creditor protection. But once clients withdraw funds from an ERISA-qualified plan, their assets may become vulnerable to creditors, so be sure to talk to your clients about protecting their retirement plan assets before they take a withdrawal. And, if they have creditor worries, have them speak with an attorney.
The content of this document is for general information only and is believed to be accurate and reliable as of the posting date, but may be subject to change. It is not intended to provide investment, tax, plan design, or legal advice . Please consult your own independent advisor as to any investment, tax, or legal statements made here.
What About Inherited Roth Ira Assets
The Supreme Courts decision seems to be limited to IRAs inherited by someone other than a spouse. There are special tax code rules for spousal beneficiaries, including the ability for a surviving spouse to roll over the inherited IRA into their own IRA.
However, Clark v Rameker applies to Self-Directed IRAs . A Self-Directed IRA is an account that does not have a custodian, meaning account holders are able to invest in non-traditional assets, such as real estate, precious metals, and renewable energy.
The court gave the following as reasons for the ruling:
- Unlike other retirement plans, inherited IRAs do not permit additional contributions.
- Account holders can liquidate inherited IRAs at any time for any reason without penalty.
- IRA owners must either begin taking minimum distributions every year or withdraw all the IRA funds within five years of inheriting them, no matter how far they are away from retirement.
Its important to note that after an IRA is inherited by a beneficiary other than a spouse, the law sees the account in the same way as all other assets when it comes to creditor protection. That means that a creditor may be able to may obtain a judgment and a court order to seize a Self-Directed Inherited IRA.
Some Retirement Accounts Aren’t Protected
Although retirement accounts are generally safe from your creditors when you file for bankruptcy, there are a few exceptions.
- Once you withdraw money from a retirement plan, the federal exemption no longer protects it.
- The IRS might be able to reach your retirement assets with a valid tax lien against you.
- Divorcing spouses might have access to your retirement accounts.
You May Like: Has Mark Cuban Ever Filed For Bankruptcy
Less Protection For Non
If your retirement account is not qualified or covered by ERISA, then a judgment creditor could potentially seize it. That is because some non-ERISA accounts in California do not have the same protections as ERISA accounts.
Types of non-ERISA accounts that may be vulnerable include:
IRAs, Roth IRAs and SIMPLE IRAs
403 plans for employees of a public school or university
plans that do not benefit employees, or “employer-only” plans, and
government or church plans
Is An Ira Protected From Bankruptcy
While federal bankruptcy laws have long protected 401 plans, pensions, and similar employer-sponsored, qualified retirement plans, IRAs only came under federal protection with the enactment of BAPCPA. Among a wide variety of bankruptcy reforms, including heightened requirements for filing bankruptcy under Chapter 7, BAPCPA introduced the first explicit federal bankruptcy protections for assets held in IRAs.
Before BAPCPA, IRA protections were defined at the state level, or not at all. After BAPCPA, bankruptcy protection for IRA assets is afforded to citizens in all states.
You May Like: How Many Times Has Donald Trump Filed For Bankruptsy
Think Hard Before Using Ira Funds To Pay Dischargeable Debt
People struggling with overwhelming debt often look to IRAs and other retirement funds as a ready source of cash they can access to pay down unsecured debt like credit cards and medical bills. This is almost always counterproductive and can cost you a lot of money. First, if you withdraw the money before you turn 59 ½, youll be assessed a penalty of 10%, and the money will be considered taxable income. Second, when you pay down debt with money from an IRA, you are wasting money you can protect in bankruptcy to pay a debt that would get wiped out anyway. Before you withdraw the money, you should carefully weigh your options with an attorney or a financial professional.
What Are The Different Types Of Bankruptcies
When we talk about personal bankruptcy cases we are generally referring to Chapter 7 and Chapter 13.
A Chapter 7 case is a âtotal liquidationâ bankruptcy, where at the successful conclusion of the case most, if not all, of your debts are discharged. This means that any expensive property is sold off to pay your debts and any eligible debts that remain get erased.
A Chapter 13 case, in contrast, involves paying back a percentage of your debts through a three to five year repayment plan. This is usually based on a number of factors including your income and types of debt.
Although your retirement income is a factor in either a Chapter 7 or a Chapter 13 case, this article will primarily focus on what occurs during Chapter 7.
Read Also: How To File For Bankruptcy In Oregon
California Protection For Private Retirement Plans
If your pension plan does not fall under ERISA, but qualifies as a “private retirement plan” under California law, then it may be fully protected. Unlike with an IRA, you do not have to prove that the funds are necessary for your support.
To qualify, the PRP must be set up as an employment pension plan, with written rules restricting access to the funds, much like an ERISA account. You cannot just deposit a single large lump sum of your own money or roll over your IRA funds into a PRP. Instead, a PRP is a retirement savings plan available for individual employees whose employers do not offer pension plans or other ERISA accounts. The PRP must be used for retirement purposes and you cannot casually transfer funds in and out of the PRP. If you use PRP funds prematurely and for non-retirement purposes then it may lose its exempt status.
What Does It Mean To Say A Retirement Account Is Protected
During a Chapter 7, if there is anything of value, the Chapter 7 Trustee has the right to seize valuable property, sell it, and use the proceeds from the sale to pay back some money to your creditors.
Assets that are âprotectedâ are yours to keep and will not be taken to sell off your debts.
Recommended Reading: Groce And Dearmon
Can Creditors Take Your Retirement Money
A creditor cannot confiscate or garnish your 401 funds, in most cases. ERISA is a federal legislation that governs 401 plans . Assets in ERISA-covered programs are protected from creditors.
Federal tax liens are an exception if you dont pay your taxes, the IRS can seize your 401 assets. IRAs are not covered by ERISA, although they do offer some creditor protection.
The first $1 million in IRA assets is generally protected from a bankruptcy claim. Beyond this, state law may provide extra protection.
Talk To A Tax Attorney
Need a lawyer? Start here.
Read Also: How Do I File For Bankruptcy In Virginia
Other Ways To Protect Your Retirement Accounts In California
If you live in California and have a non-exempt, non-ERISA retirement account that a judgment creditor is trying to attach, you might consider filing bankruptcy. Bankruptcy laws may allow you to protect up to $1 million in your IRA, while still affording you relief from your creditors. To learn more, including whether you qualify for bankruptcy protection, visit Nolo’s Bankruptcy topic area.
Can An Ira Be Seized In A Lawsuit
Traditional and Roth IRA assets are typically protected from lawsuits, according to a 2005 ruling by the United States Supreme Court. The court, however, left a critical question unanswered when it stated that IRA funds are protected only to the degree that they are reasonably necessary to maintain the IRA owner and his or her dependents. Depending on the regulations in the state, the ruling permits any amount of money above and beyond that amount to be taken in a lawsuit. Individual judges, on the other hand, are generally free to decide what is reasonable.
Also Check: How Many Donald Trump Bankruptcies
Are Iras Subject To Creditor Claims
Individual Retirement Accounts offer numerous benefits. Legal protection of funds in IRA accounts against claims of creditors when an IRA account owner files for bankruptcy is one of the lesser known benefits. Funds in an IRA are not subject to creditor claims under conventional bankruptcy rulesin technical terms, they are exempt from being included in the bankruptcy estate. This means that an IRA owner can file for bankruptcy, discharge all of his or her debts, and keep all of the money in his or her IRA. The goal of this rule is to assist debtors who have filed for bankruptcy in getting a fresh start. This regulation is also applicable to other forms of retirement funds.
What You Should Know About Asset Protection Exemptions In Arizona
1. What are Asset Protection Exemptions?2. What are drawbacks of relying on Asset Protection Exemptions?3. What are some of the Asset Protection Exemptions?
- Homestead Exemption Up to $150,000 of equity in your primary residence is exempt from creditor claims in Arizona. See A.R.S. 33-1101. The exemption is automatic.
- Household Goods Arizona law protects essential household goods up to $6,000 in value. This includes furniture and furnishings, appliances, and personal items. See A.R.S. 33-1123.
- Personal Property Arizona law protects many personal items such as $300 cash, clothing up to $500 in value, musical instruments up to $400 in value, domestic pets, a wedding ring up to $2,000 in value, books up to $250 in value, a bicycle up to $1,000 in value, a firearm up to $1,000 in value, , a computer up to $1,000 in value, a car up to $6,000 in value, and a wheelchair. See A.R.S. 33-1125. A separate exemption protects up to $5,000 in tools of the trade, which includes websites and marketing tools. See A.R.S. 33-1120.
4. Is life insurance protected by law?See A.R.S. 33-1126 .See A.R.S. 20-1131. See A.R.S. 33-1126. 5. Are retirement account assets protected by law?See A.R.S. 33-1126. Clark v. RamekerClarkAbout the Author
Recommended Reading: How Many Times Did Donald Trump File Bankruptcy
Our Bankruptcy Attorneys Can Help You Resolve Your 401 Issues
When you are trying to figure out how to navigate issues related to your 401 and bankruptcy, you will need a lawyer with specific experience on bankruptcy in Houston who has the right knowledge and resources to help you. Contact the Law Offices of Kretzer and Volberding P.C. online today to discuss your concerns.
How Safe Is Your Retirement Nest Egg
So, youve transferred your 401 retirement nest egg into an individual retirement account . This gives you more control over management and distribution of IRA assets. But, you may have concerns about creditors and their ability to attack your retirement assets, which are now conveniently consolidated from several employer plans into one convenient IRA. Will those IRA assets be protected from creditors regardless of what happens to you?
Employer sponsored retirement plans, such as 401 plans, are protected from creditors by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 as well as a specific ERISA statutory provision. The Act also protects other retirement funds like IRAs, in an aggregate amount of up to $1,000,000 . The protection from creditors is implemented through an exemption from the assets available to creditors in bankruptcy, and this protection is available on a nation-wide basis .
The Supreme Courts decision does not deal with bankruptcy protection of retirement funds like IRAs in those states which have bankruptcy exemptions that are not based on federal law. For example, Illinois law provides an exemption for assets of retirement plans in bankruptcy. Although inherited IRAs with non-spouse beneficiaries are generally regarded as notprotected by the Illinois statutory exemption, the status of inherited IRAs in the hands of surviving spouses remains an open question.
Andrew S. Williams
Also Check: Taco Bell Bankruptsy
Are Iras Protected From Creditors In California
The regulations governing retirement protection in the case of a lawsuit differ from one state to the next. Many states will not protect your retirement and IRA accounts from furious creditors.
If you are being sued or going for bankruptcy in California, for example, owning a retirement account is risky. IRAs are not as effectively protected in California as 401s. In fact, this means that if you are sued in California for personal injury, your 401 will be protected from the prosecution, but your IRA will only be protected to the extent that the court thinks necessary. The court will make a decision based on a particular amount that the court believes will be enough to sustain you and your dependents in retirement.
If A Company Goes Bankrupt What Happens To My 401
Can a company take your 401 money? Generally, no. In addition to protecting your retirement savings in bankruptcy, the ERISA is a federal law that requires retirement plan assets to be held in a trust account, apart from an employers other business assets. Therefore, a partition is created which results in employers being prohibited from accessing 401 savings funds for their business operations, including the payment of creditors in the event that the company declares bankruptcy.
Experts do warn of two circumstances where the employer may fail to pay all the money entitled to you in your 401. The first circumstance could occur if the employer didnt deposit your contributions before declaring bankruptcy, which is usually limited to a pay periods worth of contributions. The second circumstance is when an employer match hasnt been deposited into the trust fund, which could be a larger amount of money routinely matched monthly or even yearly. If the employer hasnt made its matching contribution to the plan before bankruptcy, the employers match to your 401 could be lost.
As you can see, the answer to the question of what happens to my 401 if my company goes bankrupt depends to some extent on the practices of each employer, but employees can check their pay stubs to familiarize themselves with how the contributions are made and ask an HR representative when the matches occur. Where possible, choose a responsible employer who handles this area with care!
Don’t Miss: Getting Personal Loans After Bankruptcy
Ira Protection From Creditors By State
Are IRAs protected from creditors? The creditor protection for these plans depends on your state residency, and whether the assets are yours or if you inherited them. You will find the asset & creditor protection by state for a self-directed IRA below. You will find IRA protection for California, Florida, New York every state. IRA Asset Protection, also known as IRA Creditor Protection or IRA Bankruptcy Protection, can help protect the assets in your IRA from lawsuits, creditors, liens lawsuits and much more. It is a type of technique that provides IRA asset protection by state. It is advised that you protect your assets prior to any claims or liabilities, as its often too late once a claim has occurred.
As you may know, when using a Self-Directed IRA LLC, you have the opportunity to make a wide range of traditional and non-traditional investments. However, its important to note that you also receive strong asset and creditor protection. So by using an LLC that your IRA completely owns , you gain another layer of limited liability protection. For example, if you use a Self-Directed IRA LLC to make investments, you have better asset and creditor protection vs making the investment yourself. Because of this, its a wise choice to invest and grow your retirement funds in a self-directed IRA LLC. It will protect your retirement assets from creditors, inside or outside of bankruptcy.