Creditor protection IRA vs. Plan

[Craig Schiller]

Hi Benefits Link users:

I'm wondering if I'm understanding certain creditor proection issues correctly.

If someone who lives in California rolls money to an IRA, the IRA assets can still be attached EXCEPT in bankruptcy. If a doctor were wanting creditor proection, but would be extremely unlikely to ever need to file for bankruptcy, I think the rollover IRA would be subject to general California credtior protection, something called Spendthrift amounts, that aren't that high.

If the person rolled their money to a new defined benefit plan that only he would be in, what type of creditor protection outside of bankruptcy does he get?

Thanks for any opinions!

Craig Schiller, CPC

[PensionPro]

IRA assets are protected from bankruptcies but not other types of judgments. Qualified plan assets are protected from bankrupticies and other types of judgments under ERISA.

The amount of bankruptcy protection for IRA assets may vary by state. My understanding was the the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCA) raised the limit on bankruptcy protection to $1 million of IRA assets even if the limit is lower under state law, but you may want to verify that because the article below seems to offer a different view. Qualified plan assets rolled over into an IRA are exempt from bankruptcy proceedings even if the amounts are greater than $1 million.

This 2011 LA Times article might be helpful because it references the golden state: http://www.latimes.com/la-ira-story3,0,6977190.story

[Craig Schiller]

Hi Pension Pro -

Thanks for your help. Between the article and some other reading, I think that the rules are somewhat as follows for an owner whose defined benefit plan has no participants:

My understanding now is that 401(a)(13), would provide someone protection in general from creditors even if the owner is the only participant. (I don't think 401(a)(13) protection depends on the entity being covered by Title 1 of ERISA).

In Bankruptcy, OTOH, the provision that exempts from the bankruptcy estate trusts "exempt under applicable non-bakruptcy law" does not apply, as the courts have interpreted such assets not exempt for this purpose uness covered by Title I of ERISA.

IRA's, which rollover money from any IRS qualified plan, or substantially qualifed plan, are considered "exempt under applicable non-bankruptcy law", and therefore do get projection from creditors in bankruptcy.

However, as the article you referenced helped verify, if not in bankruptcy, the IRA's are subject to the state's rules on creditors. For Caifornia, this means whatever the court interprets are enough to meet ones needs to live on.

Another words, Better creditor protection in the defined benefit plan but worse in bankruptcy, while better in an IRA for bankruptcy but worse for creditors.

I'm not sure if I have it right, but this is how I understand it.

Craig Schiller, CPC