By Jenny Kiffmeyer, J.D – The Retirement Learning Center
Is it better to keep retirement assets in a 401(k) or roll them to an IRA; which has better creditor protection?
Highlights of the Discussion
The answer could depend on the amount of assets they have and if they are asking about bankruptcy or nonbankruptcy protection. Let’s look at the laws that pertain to creditor protection.
- The level of creditor protection for retirement plan assets depends on 1) the type of plan assets, and 2) whether the owner of the assets has filed for bankruptcy and, if not, the governing laws of the state with jurisdiction over the assets.
- The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), effective October 17, 2005, clarified the level of creditor protection for retirement plan assets when the owner has filed for bankruptcy.
Bankruptcy
- The BAPCPA exempts from a debtor’s bankruptcy estate retirement assets that are held in
- IRC Sec. 401(a) plans (e.g., 401(k), defined contribution and defined benefit plans),
- 403(b) plans,
- Traditional and Roth IRAs (since 2022, up to $1,512,350 of contributory assets, indexed every 3 years),
- Retirement plan assets rolled to an IRA (rollover IRAs protected in full)
- Simplified employee pension (SEP) plans,
- Savings Incentive Match Plans for Employees (SIMPLE) plans,
- Church plans,
- Governmental plans,
- Multiemployer plans,
- Eligible 457(b) plans of state and local governments and IRC Sec. 501(c)(3) tax-exempt organizations and
- IRC Sec. 501(a) plans of tax-exempt organizations.
- Eligible rollover distributions under IRC Sec. 402(c) retain the unlimited bankruptcy protection given to them while held in the exempt retirement plan if they are contributed to another eligible retirement plan within 60 days of distribution. Earnings on the rollover assets are protected as well.
- Note: Inherited IRA assets do not have creditor protection.
Nonbankruptcy
- In nonbankruptcy situations, assets held in ERISA plans are fully protected under the anti-alienation provision of the law [see Section 541(c)(2) of Bankruptcy Code pursuant to Patterson vs. Shumate, 504 U.S. 753 (1992) and 29 USC Sec. 1056(d)(1)].
- The protection of IRA assets (including rollover amounts and inherited IRA) from general creditors of the IRA owner in nonbankruptcy situations falls under applicable state law, with many states—but not all—providing some level of exemption. (Link to State Government Websites for more information)
- Keep in mind that any qualified retirement plan or IRA (including traditional, Roth, rollover, SIMPLE or SEP plan IRAs) may be subject to an IRS tax levy.
Conclusion
In bankruptcy, retirement plan assets rolled to an IRA retain creditor protection. However, in nonbankruptcy situations, state laws apply to IRA assets, including rollover IRAs. For specific situations, individuals should consult legal counsel.
