IRA vs 401K Protection from Bankruptcy and Creditors
I have a client who is terminating their 401K Plan. The participants have to decide whether to roll their funds to an IRA or to the new 401K Plan. While I have read your article regarding creditor protection, I need a source to provide documentation to the pension board and participants as far as bankruptcy protection and creditor protection federally and in New York State. Any advice/ help/ resources are greatly appreciated. Thanks.
Permalink Submitted by Alan - IRA critic on Thu, 2018-11-29 16:09
The 401k balance is completely protected against creditors by the ERISA anti alienation clause. For those participants living in NYS (and who plan to stay there), NYS does provide complete IRA creditor protection per the NY Civil Practice L. and R., Sec 5205(c). IRA creditor protection provided by state statutes is individual state driven. However, if the balance is rolled to an IRA and the employee eventually moves to a state with more limited IRA protection there will be more creditor exposure after the move. If an employee moves to such a state and is still working for an employer sponsoring a plan that accepts IRA rollovers, the employee could roll the IRA back to that employer’s 401k (or similar ERISA plan) and immediately restore ERISA protection for that balance.