Creditors will have a Tougher Time Getting to Your IRAs

No one likes to think about bankruptcy. But it can happen to the best of people. In fact, the Administrative Office of the U.S. Courts reported that for the 12-month period ending March 31, 2005, there were almost 1.6 million bankruptcy filings.[1]

A study by Harvard University showed that medical problems caused half of these individuals to seek protection from creditors.[2] And according to the Congressional Record, seniors (65 and older) are now the fastest growing age group filing for bankruptcy protection.[3] If circumstances force you into bankruptcy, you can take comfort in knowing that some of your assets might now be better protected.

On April 20, 2005, the President signed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. The purpose of this new legislation was to revise existing laws to help make credit more affordable for Americans.[4] Part of the regulations expanded the language regarding retirement plans.
All money that you have in qualified retirement plans, such as 401(k)s and profit sharing plans; and 403(b)s are now exempt from bankruptcy. And your IRAs and Roth IRAs will have a $1 million limitation that is adjusted for inflation. Now you may think that this isn’t a particularly large amount since many investors get big rollovers when they retire. The government took care of you there. The $1 million limitation applies only to your contributions and the associated appreciation. It does not include funds rolled into your IRAs from qualified plans, which have unlimited protection.

For example, suppose that over the last 30 years you had faithfully contributed the maximum into your IRA. Now that account is worth $400,000. What if you still have $800,000 sitting in your former employer’s 401(k) and were afraid to roll it into your IRA because your state had poor bankruptcy protection laws? The new federal law has changed all of that.
For even though the IRA will be worth $1.2 million after the rollover, only the original $400,000 will apply to the $1 million limit. The balance falls into the unlimited protection category. However, this only applies to bankruptcy. Not to judgments awarded in other courts where state creditor protection laws could possibility prevail.

Thanks to the new provisions, your IRAs will have more creditor protection and be there when you need the money. Therefore, you can have greater peace of mind when you roll your qualified plan funds into an IRA. Plus you’ll have the flexibility that an IRA can offer, such as more investment options, less restrictive rules, and tax-savings provisions for your beneficiaries. I strongly recommend all investors consult with their own qualified tax and financial advisors prior to making any investment decisions.
[1] http://www.uscourts.gov/Press_Releases/news61005.html
[2] http://www.hms.harvard.edu/news/releases/2_2Himmelstein.html
[3] http://www.senate.gov/~feingold/statements/05/03/2005415658.html
[4] http://www.whitehouse.gov/news/releases/2005/04/20050420-5.html