Protection varies, according to state law.
IRAs are protected from bankruptcy. However, there are some limitations you should guard against, according to The Balance in “What is IRA Bankruptcy Protection?”
President George W. Bush signed bankruptcy protection into law in 2005 with the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCA). This new law insulated retirement accounts from creditors, by providing that contributions to various retirement plans were excluded from the property of the estate. This was the first time that protection for individual retirement accounts existed.
Today, IRA bankruptcy protection includes all the retirement accounts: traditional IRAs, Roth IRAs, SEP IRAs, SIMPLE IRAs and rollover IRAs. Protection is limited by the amount, which increases on a regular basis.
Here’s a look at the IRA bankruptcy protection from BAPCA:
Traditional IRAs and Roth IRAs: The most recent adjustment was in 2016, when the protection limit was increased to $1,283,025.
SEP IRAs and SIMPLE IRAs: These IRAs receive the same protection limits as traditional and Roth IRAs. They are used by self-employed people and small businesses.
Rollover IRAs: These are traditional and Roth IRAs that were funded by rollover transfers from an employer-sponsored retirement plan, like a traditional 401(k) or a Roth 401(k).
Inherited IRAs, also called Beneficiary IRAs: The Supreme Court determined in Clark v. Rameker that the above protections do NOT apply to inherited IRA’s. If protection of the IRA’s you leave your loved ones is a concern, an experienced estate planning attorney can help.
These protections are considered to be high enough to cover most American’s IRA accounts. There are some assets that are not protected. Some examples include general creditors, IRS levies and divorce.
General Creditors: There’s no federal protection for IRA owners, and the protection from general creditors varies by state law. In California, that protection is minimal.
IRA Assets and IRS Levy: If you owe past taxes to the IRS, they can levy your pay and your IRA. They’ll generally go after other assets first, but if necessary, your IRA is fair game.
IRA Assets and Divorce: What happens to your IRA in a divorce, depends upon a court order and other assets that are held. If IRA assets are divided, taxes can be avoided. According to the “incident to divorce” rules in the tax code, IRA assets can be transferred and split between spouses without taxation within one year of the formal divorce date. This is one where you want a skilled CPA and family law attorney on your side, so the tax liability is minimized.
What about 401(k)’s? Good news, under ERISA, the federal law governing 401(k)’s, these accounts are protected in both bankruptcy and from lawsuits without limitation, unlike IRA’s.
An estate planning attorney can advise you in creating an estate plan that fits your unique circumstances, as well as advise you on protecting your IRA assets.
Reference: The Balance (Dec. 12, 2018) “What is IRA Bankruptcy Protection?”