The ERISA consultants at the Columbia Management Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. A recent call with an advisor in Massachusetts is representative of a common inquiry related to bankruptcy protection of retirement plan assets. The advisor asked:
My client may be faced with the need to file bankruptcy. I know his 401(k) plan account balance would remain protected from general creditors in that case. But what if my client rolls over his 401(k) to an IRA? Is the rollover IRA still protected from the claims of creditors if he files for bankruptcy?
Highlights of Discussion
• For the answer, we must refer to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, effective Oct. 17, 2005. The Act clarified the level of bankruptcy protection for retirement plan assets.
• Assets in a defined contribution plan (including a 401(k) plan) or in a defined benefit, 403(b), 414, 457 or 501(a) plan are protected from bankruptcy in their entirety with no limit. Even old “Keogh” plans (qualified retirement plans for owner-only businesses) have unlimited protection in bankruptcy situations.
• Assets rolled over from one of the protected plans to an IRA retain the unlimited bankruptcy protection given to them while held in the plan.
• Contributory assets in a traditional or Roth IRA are protected from bankruptcy up to the limit of $1 million (adjusted periodically for inflation).
• Simplified employee pension (SEP) and savings incentive match plan for employees (SIMPLE) IRA plan assets are protected without limit.
Conclusion
Bankruptcy protection for retirement plan assets is an important consideration for investment clients. The Bankruptcy Abuse and Prevention and Consumer Protection Act of 2005 gave the industry some clarity. Outside of bankruptcy, retirement accounts that qualify under the ERISA definition of employee benefit plan are protected against seizure by creditors (except the IRS). Creditor protection for IRAs outside of bankruptcy depends on individual state law.
The Columbia Management Retirement Learning Center Resource Desk is staffed by the Retirement Learning Center, LLC, a third-party industry consultant that is not affiliated with Columbia Management. For informational purposes only. Please consult a tax advisor or attorney for specific tax or legal needs. © 2014 Columbia Management Investment Advisers, LLC. Used with permission.
