BANKRUPTCY PROTECTION FOR RETIREMENT PLANS AND IRAs

Because of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCA), investors facing bankruptcy can now shield their IRA assets from creditors. While retirement plans that meet the requirements of the Employee Retirement Income Security Act of 1974 (ERISA) — such as employer-sponsored plans like 401(k)s and 403(b)s — have long been excluded from an individual’s bankruptcy estate, BAPCA extended these bankruptcy protections to IRAs and certain other investment products.

This development gives IRA investors a degree of protection against creditors that didn’t exist before. “Industry statistics show that the average worker changes jobs five to seven times during a career, resulting in many ‘orphan’ IRAs that investors end up consolidating into a single IRA,” says Ray Bellucci, vice president, TIAA-CREF Product Management. “These new developments provide additional protections for investors who frequently change jobs and may want to consolidate their multiple retirement plans into IRAs.”

Here’s a quick overview of what these protections mean for IRA owners facing bankruptcy:

BAPCA only applies to bankruptcies. These protections do not shield an investor’s IRA assets from other types of judgments, such as civil lawsuits. Qualified retirement plans, however, because of ERISA, are protected from both bankruptcies and other types of judgments.
Contributory and Roth IRA assets are capped at an inflation adjusted amount of $1 million. BAPCA offers protection for all contributory and Roth IRA assets up to a $1 million limit. This $1 million cap should provide ample protection for IRA investors, because it’s unlikely that many investors have accumulated over $1 million in their IRAs. (Note that IRAs were only introduced in 1974 and, until 2002, the maximum annual contribution was just $2,000.)
Rollover IRAs are exempted from bankruptcy beyond the $1 million limit. According to BAPCA, qualified retirement plan assets that are rolled over to an IRA are completely exempt from bankruptcy proceedings, even if the amounts exceed the $1 million limit that’s in place for contributory or Roth IRA assets. This aspect of BAPCA can make rolling over qualified retirement plan assets to an IRA a good strategy.
BAPCA also covers SEP and SIMPLE IRAs. Assets within Simplified Employee Plan (SEP) and Savings Incentive Match Plan for Employees (SIMPLE) IRAs are excluded from bankruptcy proceedings — and they’re shielded for unlimited amounts. Additionally, BAPCA provides bankruptcy protection for Keogh plans and independent (or “solo”) 401(k) plans, which are typically set up by someone operating a sole proprietorship. Because ERISA protections do not extend to either Keogh or independent 401(k) plans, the bankruptcy protections offered by BAPCA provide safeguards for investors that didn’t exist previously.
BAPCA covers certain education savings vehicles. These include Coverdell Education Savings Accounts and state-sponsored Section 529 college savings programs. Specifically, BAPCA protects any contributions made to these products for a child, grandchild, stepchild, or stepgrandchild more than two years before the filing of the bankruptcy petition. However, money contributed to these products for a child, grandchild, stepchild, or stepgrandchild that are made more than 365 days but less than 720 days before the bankruptcy filing are protected only up to $5,000 per beneficiary.
State laws come into play. Some states already have laws that shield residents’ IRAs from creditors. However, other states don’t have any protections in place, or safeguard IRAs from bankruptcy proceedings only up to a limit of $100,000. In these cases, BAPCA increases this protection up to the $1 million limit.

Next Steps
Considering the many factors involved in bankruptcy proceedings, if you have assets in IRAs or other products potentially affected by BAPCA, consult with your tax advisor for the appropriate strategies for maximizing protection of your assets.

The tax information contained herein (including any attachments) is not intended to be used, and cannot be used, by any taxpayer for the purpose of avoiding any tax penalties that may be imposed on the taxpayer. It was written to support the promotion of products and services addressed herein. Taxpayers should seek advice based on their own particular circumstances from an independent tax advisor.

TIAA-CREF Individual & Institutional Services LLC, and Teachers Personal Investors Services Inc., members FINRA, distribute securities products. Annuity products are issued by TIAA (Teachers Insurance and Annuity Association), New York, N.Y.