Creditor Protection 401K/Rollover IRA/etc.

[kaneohe]

http://www.fpanet.org/journal/articles/2005_Issues/jfp0805-art6.cfm

This is a very interesting article talking about the various levels of protection against creditors for different types of retirement plans in view of 2005 developments in a Supreme Court case and the new bankruptcy law.

Sorry I could not copy some interesting portions on this computer so I will have to paraphrase and hopefully not misinterpret:
1) Qualified plans under ERISA (e.g. 401Ks) still offer the best protection
2) Qualified plans rolled over into IRAs now offer much better protection than before but still are not as protected (against non-bankruptcy actions) as qualified plans.

The authors also point out various situations that may have uncertain outcomes until further laws are passed or court cases are decided.

My interpretation is that the best situation if you can tolerate it financially is to leave the 401K intact and not rollover into an IRA. The major disadvantage of that is that (for a married couple) the stretch IRA is at risk unless the couple plan not to meet their demise together and the survivor must remember to rollover the 401K into their own IRA and name their own named beneficiaries ASAP.

 

[MasterBlaster]

Kaneohe:

What is/are the downside issue(s) of a 401K in terms of the surviving spouse ? Please enlighten me.

 

[kaneohe]

My impression is that there are no downside issues for the surviving spouse. In fact, I believe that most 401K plans only allow the surviving spouse to do a rollover IRA. However if the surviving spouse does not name "named" beneficiaries in the rollover IRA (or if she takes out the 401K funds in a lump sum), the possibility of a stretch IRA disappears. Also if both spouses meet their demise simultaneously, the 401K will be paid out in a short period and no stretch IRA is possible.

So.....to me it seems that you are balancing the better creditor protection against losing the stretch IRA possibility if things don't go right---some you can plan and educate for, some you can't unless you plan not to travel together ever again.

 

[MasterBlaster]

What exactly do you mean by "stretch IRA"

Is that a joint IRA where the RMD is determined by the joint lifespan ?

Again... Plaease enlighten me.

 

[LovesLife]

A stretch IRA is one that is inherited. The required minimum distribution (RMD) of this kind begins when the original owner would have turned 70.5, but the amount of the RMD is determined by the age of the beneficiary.

 

[kaneohe]

Re: Stretch IRA

You can do a search for "stretch IRA". I had an interesting one filed away but apparently these URLs have shelf lives and it is no longer valid. Here's one to get started:
http://moneycentral.msn.com/content/Taxes/Taxshelters/P33760.asp

I also highly recommend the books by Ed Slott---don't remember the exact titles but there are several you can find at any library.

As described previously by LL, the general idea is that the RMD is determined by the age of the beneficiary so if each beneficiary names their own beneficiary in the next generation the RMD rate possibly may slow down enough to allow the IRA funds to last some number of generations. This is, for example , as opposed to letting your estate be the IRA beneficiary in which case the funds will have to be paid out in a much shorter period of time (I forget how short--I'm guessing within 5 yrs but it might be shorter).

Ed Slott has a site www.irahelp.com with a forum like this but more specialized. As always, realize the forum like this onehas the general truth but there are always exceptions.

 

[roadkill]

I have attended seminars where Ed Slott was a speaker.......excellent.

Here's his link: www.irahelp.com