Protecting Assets from Creditors: Asset Protection for Retirement Plans

Protecting Assets from Creditors: New Bankruptcy Legislation for Retirement Plans

New legislation now adds protection to retirement plans. The Bankruptcy Abuse Prevention and Consumer Protection Act clarifies debtor rights and expands the protection offered to cover retirement assets during a federal bankruptcy proceeding. While this act clears things up as far as federal cases, things are still unclear in regards to state proceedings. The new law will help answer the question, "can and IRA be taken in a lawsuit?" and protect all retirement funds that are tax-exempt, including IRC sections 403(b), 401(k) and 457(b).

If an IRA was created under an employer-sponsored IRC section 408, it is excluded from any federal bankruptcy case. In addition to the IRA, pensions, 401(k) funds that have been transferred to a rollover IRA account and profit-sharing are all excluded. The new Bankruptcy Code also excluded Traditional and Roth IRAs. These types of IRA accounts are subject to an exclusion limit of $1 million. This limit also applies to a rollover from a SIMPLE IRA or SEP into a Traditional or Roth. To avoid any confusion if there is ever a federal bankruptcy proceeding, take caution when rolling over any retirement savings. Always be sure that the rollover IRA is not connected to any other IRA account that the debtor owns.

Other Forms of Protection Outside of Federal Bankruptcy

This new act does not address any retirement funds that are involved in state law attachment or garnishing proceedings. Retirement funds can be attached outside of a bankruptcy. It is very important to know the differences between retirement plans. This will help you understand if the plan is protected under the new legislation.

Asset Protection for SEP and SIMPLE IRAs

These retirement plans are treated a bit differently than a Traditional and Roth IRA. The Labor Department and the Federal Court of Appeals have ruled that Sep and SIMPLE IRAs are ERISA pension plans. This is because these plans are arranged by an employer. Most ERISA pension plans are unable to be touched by creditors, thus it is obvious what's better, 401k or Roth IRA, in lawsuit issues, a company-sponsored 401K is safer. Despite SEP and SIMPLE IRAs being considered ERISA pension plans, these retirement plans are not protected. This means that outside of bankruptcy, these plans are at an impasse. They do not qualify for the protection that ERISA plans receive, even though they are categorized as ERISA plans.

Asset Protection for Traditional and Roth IRAs

If a traditional or Roth IRA is established by an individual, it is not considered an ERISA plan. This means that there are state laws which can protect them. Not every state will protect an IRA. It is advised that you check to find out what asset protection is offered by your state and how an IRA falls into that protection plan. Keep in mind that if you rollover any money from an employer-sponsored plan into an individual IRA plan, those funds are no longer considered to be ERISA and are not protected. This may seem confusing since the funds were protected when in the original retirement plan. However, when you roll the funds over to another IRA plan that was established by yourself, that plan is not protected.

Before making any decisions regarding rollovers or transfers, always check to see if your state protects IRA plans. If they do, then your assets will be safe no matter what. If the state does not protect such plans, you are at risk of losing the assets in a lawsuit.

Asset Protection for Owner-Only Plans

Any plan that is classified as ERISA will be protected inside or outside of a bankruptcy proceeding. However, if a retirement plan benefits only the owner of the plan and their spouse, it is not considered to be an ERISA plan and it will not qualify for protection. In a bankruptcy proceeding, owner-only plans are not at risk. If there is no bankruptcy proceeding, the plan will still be protected if non-owner participants are added to the retirement plan. This means that if you add other participants, the plan is no longer owner-only and it will be protected. This is one of the best ways to protect any owner-only retirement plan.

Current Laws in Asset Protection

Under the new legislation, all retirement plans and IRAs are protected in a bankruptcy proceeding. Outside of bankruptcy, some plans may be protected by ERISA. These plans must be qualified to receive protection and are usually pensions, profit-sharing and 401(k) plans. Some state laws are in place that will protect other retirement accounts, such as Traditional and Roth IRAs. If you have a SEP, SIMPLE IRA or an owner-only plan, additional planning may be needed to protect these retirement plans. They do not qualify for any state protection.

It is very important to take the steps needed to assure that your retirement plans are protected. These accounts usually hold many assets in them and they are often targeted by creditors. Make sure your retirement plans are protected outside of bankruptcy, especially if they do not qualify for ERISA protection.