Rollover vs contributory IRA creditor protection
My client has three retirrement accounts that I want to consolidate into a new IRA account: a contributory traditional IRA, a SEP IRA and a 403(b) plan from a former employer. Can my new account be titled “Rollover IRA” with all three accounts transferred in? Or do I have to establish two new IRA accounts instead: a rollover IRA (for the 403b transfer) and a contributory IRA for the other two IRA’s? We want to consolidate into one account but I’m unsure how the creditor protection rules would work if we consolidate these accounts.
Thank you.
Mark Reich
Permalink Submitted by mk foss on Fri, 2009-09-25 22:03
There is unlimited creditor protection for U.S. bankruptcy law purposes for a rollover from a qualified plan or 403(b). IRAs have a $1,000,000 creditor protection limit. There was some talk of being able to trace the rollover portion in an IRA but I think it would be safer to have two IRAs in the case you describe.
These are the federal rules. Each state has its own standards. Alan has sometimes posted a link to a listing of the IRA creditor protection in various states.
Permalink Submitted by Alan Spross on Fri, 2009-09-25 23:36
Here is that Asset Protection link:
http://www.assetprotectionbook.com/state_resources.htm
The SEP IRA can be combined with the 403b for unlimited protection. The contributary IRA should stay separate and is subject to the 1mm limit for all such accounts in total. While the federal protection is moot if your state fully protects your IRAs, you may not know for sure which state you may eventually be living in, and/or what changes might occur with state laws. It’s a decision effected by the values at risk, costs and efficiency concerns, beneficiary tracking etc etc
Permalink Submitted by MARK E REICH on Sat, 2009-09-26 14:48
Alan:
Thanks for your reply!
My client lives in NY but let’s assume she only gets the $1 million protection for the contributory IRA. If she does decide to combine the contributory IRA and the SEP and the 403(b) rollover accounts into one account, can we title this new IRA a “rollover IRA”? And would the unlimited portion normally afforded to the SEP and 403(b) rollovers be “tainted” because the contributory IRA portion is being mixed in the same account? (You can see I am really trying to avoid having more than one new account established!)
Thanks again.
Permalink Submitted by Alan Spross on Sat, 2009-09-26 20:28
With respect to “rollover IRA” on the title, my impression is that there is no uniform guideline that institutions follow for applying the rollover label. For example, I funded a rollover IRA with Schwab a few years back and after a couple more years had my contributary Schwab IRA added to the rollover account. But the account still bears the “rollover” wording on the registration, even though it no longer meets the definition of a rollover or conduit IRA. You might try to have the combined IRA titled to include “rollover”, but the custodian’s guidelines might disallow it.
Much of the 2005 Bankruptcy Act creditor protection issues have not yet been tested in court. Experts feel that IRA owners might get a chance to provide tracing evidence for the amount of employer plan contributions in their IRAs, but are not sure. Accordingly, the conventional advice has been to play it safe and not commingle rollovers with contributary accounts or the rollover unlimited protection would be lost. Having “rollover” on the title would not hurt, but it would not be conclusive evidence either. I think it is a good idea to preserve “rollover” titling when you can, since it might help and cannot hurt. The original benefit of the “rollover IRA” title was to flag accounts that would be eligible for rollover to an employer account, but the 2001 tax legislation (EGTRRA) extended portability between employer plans and IRAs of any type, except that after tax IRA basis could not be rolled into an employer plan.
Note that the 1mm amount of creditor protection is slated to receive inflation increases according to a formula, so that limit would grow considerably over a few decades. In summary, it can’t hurt to keep the rollover registration if possible, but it would not eliminate possible investigation into whether regular contributions were included in the account balance. Any suit with potential damages over 1mm would be expected to get into these detailed discovery issues in order to expand the potential award.
The client’s life style, occupation, insurance coverage including umbrella coverage would also be a factor in determining exposure to these suits. And most importantly, none of the creditor protection levels available include protection against IRS liens or marital settlements.