IRA vs. 401k ERISA
I was wondering what the difference is as far as ERISA is concerned on an IRA rollover vs. leaving the money in the 401k. Aside from the investment options and the cost there doesn’t seem to be a real difference. ERISA protects an individual against company misdeeds. By rolling a 401k into an IRA rollover don’t you solve that problem any way? My understanding is that ERISA protects certain assets agains lawsuits but aren’t IRAs protected up to $1million also? Unclear. Please help if you can thanks. MM
Permalink Submitted by Alan - IRA critic on Mon, 2015-06-01 18:01
ERISA protects qualified plan accounts in the US from all creditors except marital settlements and the IRS. This includes other creditors of the employee. When an ERISA plan is rolled to an IRA, the ERISA protection ends and IRA protection as governed by state laws and the federal bankrutpcy Act takes over. Some states provide full creditor protection and have opted out of the federal bankrutpcy protection as it is not needed. Other states provide very limited IRA protection and in these states the IRA owner is limited to the federal bankrutpcy protection which only applies if bankruptcy is filed in the federal court system. The federal bankruptcy protection has not limits for rollover IRAs, but any IRA accounts that have received contributions are limited to 1mm in total protection. Inflation adjustments have increased this limit to around 1.25 million at present. In summary, if concerned about IRA creditor protection, check your state laws.
Permalink Submitted by Matthew Morea on Mon, 2015-06-01 18:47
Very helpful. I wonder if you know how New York State stands on this. Most of my clients are NYC based.
Permalink Submitted by Alan - IRA critic on Mon, 2015-06-01 18:56
IRAs including Roth IRAs are fully exempt from creditors in NYS (NY Statutes Sec 5205c).
Permalink Submitted by Matthew Morea on Wed, 2015-06-03 12:59
Would you know if Delaware has a similar protection? And thanks by the way for a prompt answer. The information is great. I still don’t see from a consumer standpoint (and assuming that your typical IRA is under a million) the negatives from rolling out of an Erisa plan. The protections seem fairly equal.
Permalink Submitted by Alan - IRA critic on Wed, 2015-06-03 18:10
Yes, Delware also protects IRA accounts. See Sec 4915 here: http://delcode.delaware.gov/title10/c049/sc01/index.shtml. In these two states and several others, an IRA rollover still provides creditor protection similar to ERISA protections.