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Litigation Risks - 401K and IRA


Guest Bill H
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Guest Bill H

Facts: W is a former partner of a professional service firm "XX" that operated as an LLP. The firm recently "disolved" due to litigation and government inditement and all former partners have left to practice elsewhere. The partner has substantial retirement assest invested in a Keogh plan. She would prefer to roll the Keogh assets into an IRA, but also has her new firms 401K plan available if necessary.

Question: Considering the possibility of potential lawsuits down the road impacting former XX partner personal assets; are there any risks involved to the plan assets if the partner rolls her Keogh assets into an IRA? What are they? Are there in recommended steps to avoid? Is the 401K preferable to the IRA? Why?

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Guest b2kates

You do not state what locale the partner is in, so I will answer in general.

1. If the Keogh plan covers employees and not just partners it is protected by ERISA's anti-alienation provisions.

2. Depending on the state that a person lives in IRAs may or may not be protected from alienation.

3. Is new firms 401K also protected by ERISA anti-alienation provision, if so, best protection is the direct transfer into new firms 401K plan.

4. Anti-alienation provision does not stop IRS from attaching interest in plans.

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  • 4 weeks later...
Guest rfh3

You have some good information from the prior post. I would put all in the qualified retirement plan. Other than the IRS, no creditor can attach the account - and they should not be able to if the law were truly blind.

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Both types of plans are protected from creditors. The real problem occurs in bankruptcy, either voluntary or involuntary. For exemple, in California, an "ERISA-qualified" retirement plan is safe in bankruptcy, while an IRA is not. In Texas, an IRA is safe in bankruptcy while an ERISA-qualified plan is not. The answer to your questions, therefore, depends upon: (1) whether the claims that may be asserted are sufficient to invoke bankruptcy laws, and (2) which jurisdiction is involved and what are their laws.

[Note: ERISA-qualified means qualified under IRC section 401(a), benefitting more than owners and HCEs and operated in accordance with the laws and the terms of the plan documents.]

If I were the partner and were in the State of Texas, I would roll to an IRA. If I lived in California, I would roll to the 401(k).

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Veba: I am confused by your response.I thought under Patterson v. Schumate, 112 s.ct 2242, the interest of a common law ( non owner's) interest in a qualified plan was protected from the employee's creditors in a bankruptcy proceeding. Or are you referring to the owner's interest in a qualified plan in a bankruptcy filing?

mjb

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