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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.
