Under federal ERISA law, assets held in most employer-based retirement plans such as 401(k)s, pension plans, 403(b)s, and profit-sharing plans have generally been beyond the reach of creditors. But IRAs were not protected on the federal level. Some states protected IRAs, but many provided no or only limited protection.
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Then, in the time span of a little over two weeks this April, all that changed. First, the U.S. Supreme Court unanimously ruled that assets held in IRAs, both traditional and Roth, generally are protected from creditors. The case concerned a couple who had rolled their $55,000 in company pension and 401(k) assets into an IRA, only later to have creditors try to seize the IRA after they filed for bankruptcy protection due to hard times.
But the Supreme Court ruling left an important issue unresolved. It said that assets in IRAs were protected only to the extent of what might be considered "reasonably necessary" to support the IRA owner and his or her dependents. Anything above that value could be seized by creditors (depending on the laws of the state of residence). But it didn't define what constitutes "reasonably necessary."
Slightly over two weeks later, Congress passed and President Bush signed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. Among its many provisions, the law resolved some questions left after the Supreme Court ruling and further strengthened protection of IRAs as well as plans for the self-employed.