Rollover vs. contributory IRA
Is there any difference between IRA assets that were rolled over from a qualified plan, vs. a SEP or other IRA in terms of protection from creditors? Is there any reason to specifically label an account “rollover IRA”?
Is there any difference between IRA assets that were rolled over from a qualified plan, vs. a SEP or other IRA in terms of protection from creditors? Is there any reason to specifically label an account “rollover IRA”?
Permalink Submitted by mk foss on Wed, 2011-01-05 22:15
For federal bankruptcy purposes assets in a QRP or a rollover IRA from a QRP have unlimited bankruptcy protection. IRAs of all types are limited to $1,000,000 of bankruptcy protection in total – SEPs are in that category.
If bankruptcy is not the issue – you look to state law for creditor protection for IRAs – different state has different rules. I believe Alan had a chart with a rundown of the rules state by state.
Permalink Submitted by Alan Spross on Thu, 2011-01-06 01:30
There have been different reasons over the years to register an IRA as a rollover IRA, but IRA custodians all have their different procedures regarding how long “rollover” continues to show on the registration. For example, what was originally a rollover IRA can receive a regular IRA contribution and most custodians are not going to change the rollover. I combined a contributary IRA account at Schwab with my rollover IRA, and now the remaining account still shows as a rollover.
Prior to 2002, a rollover aka conduit IRA is the only type of IRA that could be transferred back to an employer plan and it could not contain any after tax dollars. And a rollover IRA still has implications with respect to those born before 1/1/1936 who want to use the 10 year tax options or cap gain treatment on a distribution from a QRP that received IRA rollover funds.
At present, there are still many employer plans that will not accept an IRA rollover from an IRA account that is not a “rollover IRA” due to fear of getting after tax contributions in the transfer. This requirement does not guarantee them any protection, but I suspect they consider that it will reduce the chances of that happening.
But the unlimited protection in BK in certain states is a major consideration now, ie avoiding the 1mm limit that applies to all other IRAs.
Here is a link to the asset protection list of state provisions, but note that it is almost 4 years old:
http://www.creditorexemption.com/