qualified plan vs IRA bankruptcy

I had a financial advisor ask me about this today.  It's been awhile since I've had any contact with this topic.  My recollection is that regular IRAs are exempt from bankruptcy up to $1,000,000 and rollover IRAs (from qualified plans) are unlimited.  But is there a difference between federal and state bankruptcy.  I think bankruptcy laws are a state thing not federal.

The ob/gyn client with $5 mil just retired and wants to keep the K plan open indefinitely. I told him only for a year at most.  I told the FA to have the client contact an ERISA attorney.

Still - any comments  are appreciated.

I thought that IRA protection has come a lot closer to QP protection in most or all states but think maybe an estate planning or bankruptcy specialist from the respective state would be a good source to refer. I do recall seeing past court cases where rollover IRAs were afforded more protection.

Retiring with a plan doesn't require the plan be terminated and distributed. Why can't the plan continue until exhausted as long as it pays at least the RMDs, keeps document updated and files 5500s? Not saying that is preferable but do think it's possible.

13 minutes ago, CuseFan said:

Retiring with a plan doesn't require the plan be terminated and distributed. Why can't the plan continue until exhausted as long as it pays at least the RMDs, keeps document updated and files 5500s? Not saying that is preferable but do think it's possible.

Could be, but it might depend on the sponsor's structure and (of course) the plan document.  I've seen many documents that automatically terminate a plan if the sponsor is dissolved and/or bankrupt.

Naturally checking with their legal counsel, but generally Tratitional IRAs and Roths are protected up to  $1.5million, SEPs, SIMPLEs and Qualified Plans are unlimited.  However for the Traditional IRAs and Roths you'd need to check with the individual State as some States do follow the employer sponsored Plan limits.

Consider also that bankruptcy exclusions and exemptions might not be the only kind of protection from creditors an inquirer desires. An inquirer might want her lawyer’s advice about other protections, and about before-bankruptcy and beyond-bankruptcy differences between an employment-based plan and an Individual Retirement Account.

5 hours ago, david rigby said:

Could be, but it might depend on the sponsor's structure and (of course) the plan document.  I've seen many documents that automatically terminate a plan if the sponsor is dissolved and/or bankrupt.

I think the IRS still takes the position that you have to have an employer in existence to maintain a plan.

On 5/20/2024 at 3:16 PM, Tom said:

I had a financial advisor ask me about this today.  It's been awhile since I've had any contact with this topic.  My recollection is that regular IRAs are exempt from bankruptcy up to $1,000,000 and rollover IRAs (from qualified plans) are unlimited.  But is there a difference between federal and state bankruptcy.  I think bankruptcy laws are a state thing not federal.

 

Tom, bankruptcy is Federal. That's right in the constitution. The Federal Bankruptcy Code was amended in 2005 to make clear that a debtor's interest in a qualified retirement plan (401, 403, etc.) is excluded from the debtor's bankruptcy estate, and also rollovers from those plans that are in IRAs. Non-rollover IRAs are exempt up to $1.5 million, indexed annually, so a little more now.

21 hours ago, david rigby said:

I've seen many documents that automatically terminate a plan if the sponsor is dissolved and/or bankrupt.

15 hours ago, Luke Bailey said:

IRS still takes the position that you have to have an employer in existence to maintain a plan

Thanks for these points, gentlemen, I did overlook the fact that there may no longer be an "employer" in existence to sponsor an ongoing plan. If there is a corporation of some sort maybe it could be left open even if dormant. I don't know how long an unincorporated sole proprietor could go without income and/or expenses to still be considered as having a business. I do know that these questions/issues are best referred to a knowledgeable accountant or tax attorney as ErnieG mentioned.

For many service businesses, the professional might keep her corporation or other business organization alive at least as long as it might be desired to receive periodic payments from the sale of goodwill and perhaps other business assets, or to receive retired-partner payments, and to receive expert-witness or other consulting fees.

9 hours ago, CuseFan said:

I don't know how long an unincorporated sole proprietor could go without income and/or expenses to still be considered as having a business.

Over 20 years ago, I think, I heard someone with more experience than me (then) say that they had received a DL letting a deceased sole proprietor's spouse (who had the sole remaining account as beneficiary) maintain the plan indefinitely as a frozen plan as long as the spouse kept the plan amended for law changes.