Can I Open a Roth IRA and Fund it with my IRA?

Thursday, October 06, 2016

By Sarah Brenner and Beverly DeVeny
Follow Us on Twitter: @theslottreport

This week’s Slott Report Mailbag examines ERISA creditor protection differences for 401(k)s and IRAs and answers a consumer’s question on funding a Roth IRA. As always, we recommend you work with a competent, educated financial advisor to keep your retirement nest egg safe and secure. You can find one in your area here.

1.

If you roll over the assets from a qualified 401(k) plan into a rollover IRA, does the rollover IRA have the same ERISA creditor protection benefits as the 401(k) plan? I live in PA.

Thanks,

Fred A. Stutman, M.D.

Answer:
When it comes to bankruptcy protection for your IRA, the answer is very straight forward. Any funds in your IRA that were rolled over from your company plan are protected. There is no limit to this protection.

General creditor protection for IRAs is a different story. The amount of protection is determined at the state level and can vary considerably from one state to the next. You will want to see what protection is available for IRAs in Pennsylvania. There is no creditor protection on the federal level under ERISA for IRAs, as there generally is for ERISA-covered plans, like 401(k)s.

One word of caution … often, business owners (especially doctors like yourself) who may be worried about potential lawsuits keep their retirement funds in their plan accounts because they believe them to be fully creditor-proof. But that may not be the case if there are no employees participating in the plan.

If you have a 401(k) plan, but have no employees other than you and your spouse, you have no creditor protection under ERISA. If there are no employees, you will receive creditor protection available under applicable state law (similar to the way IRAs are protected), which could be substantially lower than the protection afforded under ERISA.

Your best bet is to consult with a financial advisor who is knowledgeable about these rules, which as you can see are pretty complicated. Then, you can decide whether rolling over your plan funds is a good move for you.

2.

As a retiree, can I open a Roth IRA, then fund it with my IRA?

Thanks,

Paul

Answer:
Good news! Yes, you can fund a Roth IRA with your traditional IRA. This is called a conversion and you may convert even if you are retired. There is no age limit for conversions and it doesn’t matter that you are no longer working. Should you convert? That is a different question. Conversion may be a be a smart strategy for some retirees, but it is not for everyone. You will want to consider all the factors and weigh the pros and cons. A financial or tax planner who is well-versed in Roth IRA conversions can help with this decision.

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