By DON GRAETER
As you plan for retirement, you may count on an employer-sponsored “qualified” retirement plan such as a pension plan, profit sharing plan or 401(k).
Or perhaps you are counting on your traditional IRA or your Roth IRA. Someone else may be counting on those assets, too. Creditors, perhaps? It would be nice to know if creditors could get to your retirement savings.
Up to now, your qualified plan accounts find their creditor protection in federal law and are generally fully protected – no matter how large. Your IRAs, however, find their protection in state law and, unfortunately, many states do not fully protect IRAs. In fact, the level of IRA protection varies widely by state and so has been a point of confusion for many investors. For those with little or no state IRA protection, federal bankruptcy law offers up to $1 million in IRA creditor protection.
This $1 million protection limit for IRAs applies to all of your traditional IRAs and Roth IRAs. Assume your state law offers little or no protection to IRA assets and you own two traditional IRAs and one Roth IRA. If each IRA is worth $200,000, you would have a total of $600,000 in IRA assets. The new federal bankruptcy law protects up to $1 million. So, your IRA assets should be fully protected from creditors. But, let’s assume that when you retire, you roll $500,000 from your 401(k) into one of your IRAs which will increase your total IRA assets to $1,100,000.
Amounts rolled over from qualified retirement plans, and the future growth on those rollover amounts, are both fully protected under the new federal law. These amounts are not counted toward your $1 million limit. So, in your case, the $500,000 of 401(k) monies you rolled into your IRAs is protected and is not counted toward your $1 million limit. The remaining $600,000 ($1,100,000 less $500,000) is still entirely protected as it falls below the $1 million limit. All of your $1,100,000 IRA assets are protected.
To simplify your “counting,” you may want to keep your qualified retirement plan assets in an IRA other than the one to which you make your regular annual contributions. The best way to do this may be to establish a separate IRA and roll your “qualified” retirement plan assets directly into this new IRA. The rollover amount and all future growth will be easily identifiable.
Proper financial planning includes making decisions about how to handle rollovers of qualified plan accounts and manage risks, including the potential risk of creditors. The important thing to remember is that you should avoid making rollover, risk management, or other financial decisions based solely on one aspect of risk management. Consult with your financial advisor for assistance with rollover decisions and incorporating proper risk management into your financial plan.
Don Graeter is a financial advisor at Central Bank. Contact him at email@example.com or call 502.420.1337.