Federal law protects qualified retirement plan accounts from creditors and lawsuits. State law protects IRAs. Many wrongly believe that these accounts will remain asset-protected after their owners die. This article first reviews the asset protection of qualified plans and IRAs and the required distribution rules for account owners. Next it discusses the alarming concurrence of courts that inherited IRAs are not asset protected. Finally, it explores how Retirement Plan Trusts can provide that asset protection, along with allowing the retirement accounts to be taken over the beneficiary’s lifetime. These articles will run over a few months’ time.
Asset Protection of Qualified Plans and IRAs
Asset protection for an owner’s qualified retirement plan accounts is provided under federal law, while any that exists for IRAs are provided only under state law. ERISA (the Federal Employee Retirement Income Security Act of 1974) provides protection from creditors for all qualified plan assets while they remain inside the plan. ERISA’s asset protection for qualified plan distributions, however, depends upon whether the plan is a pension plan (complete protection) or a welfare benefit plan (no protection). Under ERISA, a “pension” retirement plan is any “plan, fund or program which…provides retirement income to employees.” Defined benefit pension, profit sharing, and 401(k) plans are all “Pension” plans under that definition. ERISA protections are the same both in bankruptcy court and outside of bankruptcy. ERISA’s protection also extends to an owner’s IRA assets that were rolled over from a qualified plan.
Non-Bankruptcy Protection for IRAs
ERISA does not govern IRAs and Roth IRAs. Any non-bankruptcy protection afforded for them comes under state law, which varies widely from state to state. That protection goes all the way from unlimited protection to protection of a specified amount to protection of a court-determined amount reasonably necessary for the debtor and any dependents. Also some state statutes may not protect Roth IRAs or IRAs converted to Roth IRAs.
Bankruptcy Protection for IRAs
Bankruptcy law only protects up to $1 Million of IRAs that were not created by rollover from a qualified plan. Do not combine an IRA rolled over from a qualified plan with one that was not, because doing so can jeopardize the client’s asset protection in bankruptcy.
Asset Protection of Inherited Retirement Plans Including IRAs
Texas courts have held that inherited IRAs have no asset protection, whether in or out of bankruptcy. Congress did not contemplate asset protection for anyone other than the worker (or the worker’s spouse after a spousal rollover); its goal was to ensure the availability of assets during the owner/participant’s retirement. Given this reasoning, it seems likely that more courts will find that inherited IRAs provide no asset protection.
Next month, I’ll cover different trust plans that can help you protect your inherited retirement.