To the extent that a state statute attempts to protect or reach a retirement plan that is subject to ERISA, the provision may be preempted by ERISA. For example, ERISA requires generally that retirement plans must contain an anti-alienation provision. Along with qualified plans, SEPs, SIMPLE IRAs and elective deferral Roths are generally subject to ERISA; traditional and Roth IRAs are not. Qualified plans, SEPs, SIMPLE IRAs and elective deferral Roths provide some asset protection just by virtue of the anti-alienation provision.
The amount of an IRA protected under state law varies widely. Some common provisions include protection for: unlimited amounts; amounts limited to certain contribution levels; amounts limited to a specific dollar amount of assets; amounts limited to assets that would generate specific amounts of distributions; amounts limited to that needed for support; amounts limited to extent contributions were made during some recent period of time (e.g., during preceding one year); or amounts limited to extent transfers were fraudulent.
What protections are provided for qualified plans in bankruptcy?
Exclusions are provided for listed qualified plans, as well as for plans subject to ERISA Title I. Bankruptcy Code Secs. 541(b)(7), 541(c)(2). The exclusions are available for qualified plans, SEPs, SIMPLE IRAs and elective deferral Roths, but not for traditional and Roth IRAs. (Exemptions, discussed below, would also be available for qualified plans.)
What protections are provided for traditional and Roth IRAs in bankruptcy?
Exemptions may be available for traditional and Roth IRAs. Bankruptcy Code Secs. 522(b), 522(d)(10)(E), 522(d)(12), 522(n). A debtor can choose to exempt property from the bankruptcy estate under either one of two alternative methods: the list method or the nonlist method. If the nonlist method is chosen, IRAs are exempt from the bankruptcy estate. If the list method is chosen, an exemption is available for IRAs, unless applicable state law specifically does not so authorize. About two-thirds of the states provide that the federal list exemptions are not available. Those states may provide their own exemptions for traditional and Roth IRAs.
The exemptions for traditional and Roth IRAs are generally limited in the aggregate to $1,000,000. The dollar limitation does not apply to qualified plans, SEPs, SIMPLE IRAs and elective deferral Roths, including amounts (and the earnings thereon) rolled over from such accounts to a traditional IRA or Roth IRA. Consider maintaining a rollover in a separate traditional or Roth IRA to facilitate accounting for the rollover and earnings thereon.
Should a person choose the list or the nonlist method to exempt property from the bankruptcy estate?
A person choosing between the list and nonlist methods should examine all of the debtor's assets, not just the IRA provisions, to determine which method would be more beneficial for the debtor in bankruptcy. However, the discussion here is generally limited to qualified plans and IRAs.
Who are the "super creditors" against which federal or state protection may be limited?
Interests can generally be reached by the federal or state government for the failure to pay taxes or to satisfy other claims of the government. Interests may also be reached to satisfy the claims of a spouse (or former spouse) for alimony or support, or for the support of dependents.
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