The Bankruptcy Act of 2005 provides the same protection for qualified retirement and IRA rollovers from qualified plans. Traditional (i.e. $4,000/year) IRAs are limited to $1,000,000 of protection.
Qualified Plans that have common law employees are fully protected from judgment creditors through ERISA and the Internal Revenue Code. The various state laws must be looked at for qualified plans for husband and wife only and for IRAs.
Retirement plans are another area with different protection standards. In 1990, the U. S. Supreme Court made it clear that any creditor (outside of bankruptcy) couldn’t touch ERISA-qualified plan assets. In 1992, the Court noted that an ERISA-qualified plan also was not subject to bankruptcy.
Instead of wading through the definition of an ERISA-qualified plan, I’ll simply list the ones that are protected: 401(k) plans, profit sharing plans, money purchase plans, defined benefit plans, and 412(i) defined benefit plans. Keogh plans and SEP-IRAs are not ERISA-qualified plans, so they do not get blanket protection from creditors.
Many clients and advisers think that IRAs are asset protected by federal law. This is not true. Each state has determined what, if any, asset protection is afforded to IRAs, and only 26 states protect them fully. Since an IRA might be the biggest asset in a client’s estate, it is vitally important to make sure that the asset is well protected.
If your clients live in a state where IRAs are not specifically protected, the options for where to move IRA money depend on their employment status. If a client is employed and the company has an ERISA-governed plan, the client should consider rolling over his or her IRA into the ERISA plan at work.
Protection of Inherited IRA’s
In a unanimous decision in Clark v. Rameker, No. 13-299, 573 U.S. (2014), the Supreme Court ruled that an inherited IRA is no longer a retirement account, noting that a beneficiary can withdraw any amount from the account without penalty whenever he or she wishes, and so isn’t protected from creditors under federal bankruptcy law.
Perhaps one should establish a trust as the IRA’s beneficiary, or set up an IRA as a trust account while the owner is still alive. (In either case, the original owner still has access to the money before he or she dies.) Trusts, depending on the type and terms, can shield assets, including an IRA, from creditors.
And what about those who already own an inherited IRA? Depending on where they live and how long they’ve lived there, those assets might still be protected in bankruptcy proceedings. Several states, including Alaska, Arizona, Florida, Missouri, North Carolina, South Carolina, and Texas, have laws that afford that have such protection in certain cases, even in the wake of the Supreme Court decision.
ALWAYS CONSULT YOUR TAX ADVISOR FOR SPECIFIC ADVICE ON YOUR SITUATION.