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Case of the Week: Creditor Protection for Rollovers

Editor’s Note: The Case of the Week series has won a 2013 Award for Publication Excellence (APEX) from Communications Concepts, which sponsors the annual awards program, now in its 25th year. There were 2,400 entries this year. The judging was based on excellence in graphic design, editorial content and the success of the entry in achieving overall communications effectiveness and excellence. Congratulations to John, Jenny Kiffmeyer and the rest of the crew at the Retirement Learning Center!

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 a financial advisor in California is a common inquiry involving creditor protection for rollovers of qualified retirement plan assets. The advisor asked:

If my client rolls over his 401(k) to an IRA, is it protected from the claims of creditors?

Highlights of Recommendations

• The level of creditor protection for IRA assets that were rolled over from a qualified retirement plan depends on whether or not the IRA owner 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 Oct. 17, 2005, clarified the level of bankruptcy protection for retirement plan assets.
• Assets in a qualified retirement plan (including a 401(k) plan, defined benefit or 403(b) plan) are protected in bankruptcy from creditors in their entirety with no limit.
• Assets rolled over from a qualified retirement plan to an IRA retain the unlimited bankruptcy protection given to them while held in the qualified retirement plan. This includes earnings on the rollover assets as well.
• In contrast, contributory assets in a traditional or Roth IRA are protected from bankruptcy up to the limit of $1 million.
• Simplified employee pension (SEP) and savings incentive match plan for employees (SIMPLE) IRA plan assets are protected in bankruptcy without limit.
• In non-bankruptcy situations, however, the protection of IRA assets (including rollover amounts) from general creditors of the IRA owner falls under state law, with many states — but not all — providing some level of exemption.
• 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

To understand the creditor protection rules for IRA rollover assets received from a qualified retirement plan one must determine whether or not the investor has filed for bankruptcy. Financial advisors who understand the nuances of creditor protection rules in and out of bankruptcy set themselves apart from the average advisor and, consequently, are better positioned to support their clients.
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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. © 2013 Columbia Management Investment Advisers, LLC. Used with permission.

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