By Ian Berger, JD
With the recent economic downturn, you may be more concerned than ever about keeping retirement plan funds safe from creditors.
If you participate in a plan covered by the federal Employee Retirement Income Security Act (ERISA), you can sleep well at night. Your plan accounts are completely shielded from creditors – whether or not you’ve declared bankruptcy. (Not surprisingly, there is an exception allowing the IRS to recoup unpaid taxes.)
If your plan is not an ERISA plan, your funds are also completely protected if you’re in bankruptcy. That protection comes from the federal Bankruptcy Code. But the situation may be different if you owe money from a non-bankruptcy lawsuit filed against you. In that case, your ability to shield non-ERISA plan accounts depends on the law of the state where you live. Although some states offer complete protection similar to federal law, other states provide weaker protection.
But how do you know if you’re in a plan covered by ERISA? Here’s a quick primer.
The following are ERISA plans:
· Most private sector retirement plans, including most 401(k) plans and defined benefit pension plans.
· 403(b) plans sponsored by private tax-exempt employers (such as hospitals) that don’t qualify for the ERISA exemption (see below).
The following are not ERISA plans:
· Plans with no employees other than the owner and the owner’s spouse, such as a solo 401(k).
· 403(b) plans sponsored by private tax-exempt employers that qualify for the ERISA exemption. That exemption applies if the employer does not make contributions to the plan and its only involvement with the plan is administering employee elective deferrals.
· Plans sponsored by governmental or church employers. These include the Thrift Savings Plan, which is a 401(k)-type plan for federal government employees and the military.
These also include 403(b) plans for public school or church employees and 457(b) plans for state and local government workers.
SEP and SIMPLE IRAs are treated like non-ERISA plans for purposes of creditor protection.
Traditional and Roth IRAs are protected from creditors if the IRA owner has declared bankruptcy – but only up to an inflation-adjusted dollar limit (currently, $1,362,800). Since funds rolled over to IRAs from employer plans don’t count towards that limit, most IRA owners should be well below that threshold. IRA owners not in bankruptcy must rely on state law to shield their IRAs from creditors.