Part Two

Stuff Your Retirement Accounts

In one of its few debtor-friendly provisions, the new bankruptcy law strengthened protection for retirement accounts. This means that any money that is in a qualified retirement plan, such as a 401(k), or even one being maintained by a solo owner, is exempt in bankruptcy, as is all money being rolled from a pension plan into an IRA and up to $1 million in both regular or Roth IRA accounts. Previously, IRAs and solo-owner plans had little protection in bankruptcy in all 50 states. So, if you're having financial problems, you should continue to make contributions to your 401(k) and, if you have to, borrow from your 401(k). In Chapter 13, repayment of a 401(k) loan is now treated as a necessary expense.

While the new protection also extends to an IRA inherited by a spouse, it's unclear whether it applies to IRAs inherited by a child. If your child is a potential liability or a creditor risk, then you put the IRA into a trust. (This can get a bit tricky: A trust can extend an IRA's tax deferral and stretch out distributions, but only if all beneficiaries are individuals and only for the life expectancy of the trust's oldest beneficiary.)

Essentially, if you're fending off creditors in state courts, then the Federal pension law protects all but solo-owner pension plans; IRA protection depends upon the laws of the state.

If you would like more information regarding asset protection, trusts, family limited partnerships or the subject of this article please call or email our office.