Roth 401k Rollover to IRA – correct type of account to retain ERISA protection and not cause tax issues?

Submitted by Maegan Anders on Thu, 2018-11-15 16:12

What is the correct type of account to rollover assets from a Roth 401k to a Roth IRA? I distinctly remember the importance of making sure that the assets rolled over from a 401k are put in a Rollover IRA titled as such and is not commingled with the Contributory IRAs so that it will retain the ERISA protections (my understanding is no cap on creditor protection vs cap on contributory non-ERISA $). But does this apply to a Roth 401k rollover also? I am finding that the broker does not offer on their new account forms a Roth IRA rollover type of account. When we call in they tell us all rollover accounts are all “traditional” and we should rollover a Roth 401k into a Roth Contributory IRA. but then someone else at same broker said ok to rollover Roth 401k to a Rollover account and they distinguish if traditional or roth in their back end system. I’ve received conflicting messages and neither seem right. I’ve scoured the internet looking for something on this and can’t find anything so maybe I am complicating this.

Is a Roth 401k afforded the same ERISA protections as a traditional 401k and if so, is that same creditor protection under ERISA retained after rollover?

What is the correct type of account to rollover to? If Rollover accounts are traditional my concern is that there could be adverse tax impact and cause broker to withhold taxes on future withdrawals when they shouldn’t. Or that we end up losing any ERISA protection if we commingle ERISA $ with non ERISA $ in a contributory IRA.

I appreciate any guidance or direction or where to look for this answer.

Maegan



Submitted by Alan - IRA critic on Thu, 2018-11-15 16:49

  • ERISA creditor protection does not apply to IRA accounts, however is some states not opting out of the federal bankruptcy Act of 2005, rollover IRAs are covered without limit, but only when the taxpayer files for BK in appropriate court. In other words, the necessity of this is state specific.  Even if a state remains subject to the BK Act, there is still protection limits up to around 1.3mm for contributary IRAs, so if a taxpayer will never surpass that amount, they can roll the Roth 401k into any Roth IRA and commingle rollover and regular contribution accounts or combine them. Note that there are a couple states that afford lesser state protection for Roth IRAs than TIRAs. Finally, if a state fully protects all IRAs and opts out of the BK Act, then IRAs have creditor protection very close to ERISA plans. No protection applies to IRS liens or marital settlements.
  • There is no reason to consider “rollover IRAs” to only apply to traditional accounts. That is somewhat throwback terminology. However, since a Roth IRA can never be rolled into any account other than another Roth IRA, the rollover description with respect to rolling back into an employer plan is inapplicable.
  • There is no tax or withholding difference between a rollover IRA (traditional or Roth) and a contributary IRA, but for a TIRA there could be portability differences. There is no mandatory withholding on Roth 401k distributions.

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