IRA Bankruptcy
I have a question about bankruptcy protection for original IRA account owners. I know that ERISA plans that are rolled into an IRA have unlimited bankruptcy protection. I also am aware that IRA assets are protected up to an inflation adjusted $1M (1,245,475 in 2014). However, what would happen in the following scenario?
A client has $500K in an IRA from contributions over the years. Then, she rolls a 401(k) worth $2M into the IRA. Now the IRA is worth $2.5M. The funds are comingled in the existing IRA.
Is the $500K protected under the $1.245M, and the $2M rollover from the ERISA plan protected from the unlimited rollover protection?
Are the funds allowed to be comingled? Does the 401(k) rollover have to be into a separate IRA to keep track of the specific assets and the protection assigned to each “class” of IRA?
Another question: What if you have contributed $1M into an IRA and have $500K in investment earnings in the account. Is it all protected, or is the amount over $1,245,475 free game for creditors?
Thanks you!!
Permalink Submitted by Alan - IRA critic on Thu, 2014-07-17 19:52
It is not known whether a commingled IRA account protection amount would be reduced to the contributary limit of 1.245 m or whether the account sources could be broken down to accord unlimited protection to qualified plan rollover amounts and/or earnings could be allocated in proportion to the separate contributions made. Due to this uncertainty it has consistently been recommended not to commingle IRA balances and keep contributary accounts separate from rollover IRAs. Of course, if the IRA is protected by state statutes or the state has opted out of the federal BK law, there would be no need to keep the accounts separate in many cases. However, a taxpayer may not be able to predict that they would always live in a state with unlimited IRA protection or that the state statutes would not be changed.