Creditor Protection specifically on 401K Rollover to IRA assets & ERISA
In previous posts, everyone keep saying that creditor protection (in a non Bankruptcy situation) on IRA’s is subject to individual State laws. I agree BUT:
If my entire IRA value is attributed to ERISA protected 401K rollovers over the last 30-40 years, is the ERISA status (and ERISA level creditor protection) preserved in the IRA with its accumulated earnings???
Thanks for anyone that can bring clarity to this important matter..
Permalink Submitted by Alan - IRA critic on Thu, 2021-10-21 20:05
No, true ERISA protection does not apply to IRAs, so individual state statutues govern. CA for instance under recent court decisions allow otherwise non protected IRAs that are rollover IRAs from qualified plans to have creditor unlimited dollar creditor protection, so in CA these IRAs should not combined with non rollover IRA accounts that do not have much creditor protection. This post addresses non bankruptcy creditor situations.
Permalink Submitted by fairira on Tue, 2021-10-26 01:05
To Alan-iracritic: • If the assets in a 401(k) plan are directly rolled over to a new Vanguard TIRA, Vanguard will include the word “Rollover” in the registration title of that TIRA. As noted in the above post, this is helpful to an owner’s security protection in California (as well as to rolling the assets back into an employer 401(k) plan). • However, if assets in a Roth 401(k) plan are directly rolled over to a new Vanguard RIRA, Vanguard is unwilling to include the word “Rollover” in the registration title of that RIRA. • Do you happen to know if any other financial firm–Fidelity, T. Rowe Price, Schwab, etc.–is more flexible in regard to including the word “Rollover” in a RIRA’s registration title? • Thank you for your comment and thank you for your years of selfless help to an enormous number of persons.
Permalink Submitted by Alan - IRA critic on Tue, 2021-10-26 02:06
Great question. I have no idea why a Roth IRA that is funded by a rollover from an employer plan cannot be titled as a rollover IRA. As far as I know, no custodian will include “rollover” in a Roth IRA registration. Maybe it’s just historical inertia. That said, titling an IRA as a rollover IRA does not actually make it one. Custodians are very sloppy about removing the rollover moniker. For example, I have an old TIRA with Schwab that originated as a rollover IRA, but I transferred another contributary IRA account into it, and is still shows up as a “rollover IRA”.
I don’t know if a Roth IRA that is actually a rollover IRA was ever presented as such by a defendant where unlimited dollar creditor protection under the federal BK Act where it applies would make a difference.
Perhaps in a state like CA, where a true rollover IRA provides a huge advantage for creditor protection, a potential litigant might not accept the term as evidence, but might investigate whether the account is truly a rollover IRA, or just has the title. This probably would not happen unless the account had a huge balance, probably over 7 figures.
One partial explanation for Roth IRAs not carrying the rollover flag, is that they were never able to be rolled into an employer plan. Prior to 2002, pre tax IRAs had to be rollover IRAs to be rolled back into an employer plan, so that became another reason to continue to identify these IRA accounts. Initially rollover IRAs were referred to as “conduit IRAs” because of their added portability.