Creditor Protection of ERISA Assets in Rollover IRA

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  • #3160
    kaneohe
    Participant

    If 401K assets are rolled over to IRA, they get unlimited protection against creditors? Is this equivalent to ERISA or do you have to file successfully for bankruptcy for this to be true? If the IRA is mixed with both ERISA assets and non-ERISA, does this make a difference?

    #3161
    Alan S.
    Participant

    IRA creditor protection is determined by individual state statutes. There is never ERISA protection of an IRA balance. That said, some states that do not protect IRAs fully may adopt some of the federal bankruptcy Act of 2005 provisions, for which there are no limits for rollover IRAs but around 1.4 mm for contributory accounts. Bankruptcy must be filed in appropriate court to receive this protection, therefore it is inferior to ERISA protection for qualified plan balances.

    For mixed IRAs, the amount of protection depends on the individual case. For CA residents, the courts in at least one case provided state protection without limit for rollover IRA accounts, but for contributory IRA accounts protection remains very limited to the amount needed for basic support. That amount is estimated to be around 100k. There is some question about the rollover IRA protection however, and past court findings have not been consistent.

    In states that provide total protection, while not ERISA, it is pretty equivalent. There are also a couple states that under state law provide inferior protection for Roth IRA balances. There are also some states that have passed statutes providing creditor protection for inherited IRAs following loss of such protection at the federal level.

    There are numerous gray areas when it comes to IRA creditor protection.

    #3162
    kaneohe
    Participant

    Thanks, Alan.

    “In states that provide total protection, while not ERISA, it is pretty equivalent.”

    In these states,is the protection provided w/o having to file successfully for bankruptcy?

    #3167
    Alan S.
    Participant

    Yes, in such states BK filing is not required, but there might be a few states with limited rather than total protection in which filing might still be required. For example, it’s possible that the state opts out of the BK Act partially instead of completely.

    #3168
    kaneohe
    Participant

    Thanks, Alan. Sounds very diverse/complex overall.

    #3171
    Alan S.
    Participant

    Yup, there are numerous gray areas in the IRA creditor protection arena. This site explains some of these issues, but is a good starting place to at least narrow down any issues to a particular state.
    https://www.thetaxadviser.com/content/dam/tta/issues/2014/jan/stateirachart.pdf

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