| You can lose your assets to creditors (whom you've | | | | borrowed money). |
| borrowed from), to claims under divorce or paternity | | | | It doesn't include protection from qualified domestic |
| suits, to trumped-up claims against your deep | | | | relations orders (where assets can be awarded to |
| pockets, or to government for taxes owed. | | | | your former spouse or other alternate payee). Nor |
| What you have in your IRA or other qualified plan | | | | does it protect you from tax levies from the IRS. |
| has some asset protection. But federal and state | | | | Where your state law plays its part: |
| laws together determine when and how much | | | | For all those legal actions not involving bankruptcy, |
| protection those assets actually have - and from | | | | your state law will determine how much protection |
| whom. That's what this article addresses. | | | | your qualified plan assets have. So check what your |
| Qualified plans protected: | | | | state offers you for your plan. |
| The Bankruptcy Abuse Protection and Consumer | | | | Two areas where state laws vary on protection are: |
| Protection Act of 2005 (BABCPA) established the | | | | 1. plan withdrawals, |
| protection limits for various qualified plans: | | | | 2. inherited plans to beneficiary |
| * SEP (Simplified Employee Pension) IRAs, SIMPLE | | | | Most states will exempt all qualified plan assets - but |
| (Savings Incentive Match Plan for Employees of Small | | | | only while they're in the retirement account. Some |
| Employers) IRAs, and all defined-benefit and | | | | other states limit how much is exempt from creditor |
| defined-contribution employer retirement plans have | | | | actions. This amount may be fixed - possibly at |
| unlimited creditor protection in bankruptcy. This | | | | $500,000 - or only limited to what is 'reasonably |
| includes 403(b), 457, and governmental or church | | | | necessary' to support the owner and his or her |
| plans under code section 414 | | | | dependents if a claim is lodged against those assets. |
| * Distributions from all defined-benefit and | | | | Unfortunately, 'reasonably necessary' is vague. It can |
| defined-contribution employer retirement plans retain | | | | depend on your age, other holdings you have, and |
| creditor protection if they are rolled over to an IRA | | | | your obligations. It's up to a court and depends upon |
| * Traditional and Roth IRAs not created from | | | | the claim made against you. Vague terminology such |
| rollovers from qualified plans are subject to creditors | | | | a 'reasonably necessary' always invites lawsuits. |
| but only to the extent that these accounts exceed | | | | Because IRAs are vulnerable under state laws, you |
| $1 million, | | | | may be worse off rolling your company sponsored |
| * Employer retirement plan protection (including SEP | | | | plan into your own IRA for better control of your |
| and SIMPLE IRAs, and non-ERISA retirement plans | | | | retirement investments. Your state may offer much |
| such as individual 401(k)s) now receive unlimited | | | | less IRA protection against creditors than it would |
| creditor protection during bankruptcy, regardless of | | | | your company plan. |
| ERISA. | | | | Again, your state may not protect your plan assets |
| Keep good records on all your rollovers from qualified | | | | inherited by your beneficiary from his creditors after |
| plans and roll them into separate IRA accounts to | | | | you die. Check with your state. You may want to |
| maintain their unlimited protection. | | | | set up a trust as beneficiary of your retirement |
| Note also that a qualified plan is not considered an | | | | account for better protection. Of course it can |
| ERISA plan if it covers only the business owner | | | | benefit those people you designate in the trust |
| (owner-only plans). Check your state law for how | | | | document as beneficiaries. |
| these plans are protected. | | | | Remember that the bottom line in protecting assets |
| Federal protection when and from whom | | | | successfully is recognizing who you're protecting |
| Unfortunately, this protection comes into play under | | | | them from and then positioning those assets |
| bankruptcy - a federal process. The protection is | | | | accordingly - a task easier said than done! |
| from typical creditors (i.e. those from whom you | | | | |