Next in the series is a discussion of how to protect qualified retirement plans and individual retirement accounts.
The Bankruptcy Act created a broad federal exemption for tax-qualfied retirement plans. It applies to IRAs, Roth IRAs, 457 plans and 403(b) plans. If the funds are held in accounts that are exempt from income tax under IRC Section 401, 403, 408, 408A, 415, 457 or 501(a), these funds are exempt from claims in bankruptcy. This means that qualified plans for sole proprietors or shareholders or their spouses are protected from creditors.
But there is a limitation as to IRAs and Roth IRAs.The protection for Roth IRAs and IRAs is limited to an aggregate of one million dollars. The good news is that rollover contributions and earnings from those contributions are excluded from this limitation. For planning purposes, clients with rollover accounts are well advised to keep them separate from other IRA accounts. The bad news is that this exclusion does not apply to IRA funds that are rolled over from one IRA to another IRA. Note: Funds that are held in simplified employee plans (SEPS) and SIMPLE retirement accounts do not have this limitation. There is no limitation on the amount of protection available to 403(b) and 457 plans.
