401K vs IRA legal protections

[Spock]

Before I go and drain my 401K into an IRA, I've been seeing mentions that a 401K has better legal protection from creditors than an IRA.

My google-fu must be weak. I see 401Ks are protected by fed law, but that IRA protections vary by state. The only descriptions of state protections are either somewhat shady websites looking to drum up business or they just reference state codes that reference other state codes that reference various sections of multiple IRS codes that make my eyes glaze over. I haven't found anything with an authoritative easy to understand answer.



Other than "consult your tax attorney", has anybody found a good source of information on legal protections for an IRA that's doesn't require a law degree (and a legal research aide for chase all the cross references)?

 

[Dash man]

Before I go and drain my 401K into an IRA, I've been seeing mentions that a 401K has better legal protection from creditors than an IRA.

My google-fu must be weak. I see 401Ks are protected by fed law, but that IRA protections vary by state. The only descriptions of state protections are either somewhat shady websites looking to drum up business or they just reference state codes that reference other state codes that reference various sections of multiple IRS codes that make my eyes glaze over. I haven't found anything with an authoritative easy to understand answer.



Other than "consult your tax attorney", has anybody found a good source of information on legal protections for an IRA that's doesn't require a law degree (and a legal research aide for chase all the cross references)?

IRAs are federally protected up to $1M from bankruptcy (but not judgements). Rolled over 401k’s are protected if not commingled. States have there own protections. In Pennsylvania we are fully protected.

https://www.investopedia.com/ask/answers/081915/my-ira-protected-bankruptcy.asp

 

[daylatedollarshort]

I don't know about other states, but the California protection laws are here - Are My Retirement Accounts Protected From Judgment Creditors in California? | Nolo

 

[gauss]

From the web site of this law firm:

Outside of bankruptcy, traditional contributory IRAs and Roth IRAs and inherited IRAs, have protection only under state law. As such, the possibility of asset seizure by creditors depends on the application of individual state law. ERISA Plans, on the other hand, are fully protected from creditors under federal law (ERISA), except for Qualified Domestic Relations Orders (“QDROs”) and IRS levies.

It seemed like this might be relevant to your decision, given that not all creditor claims (ie lawsuits) would necessarily result in a bankruptcy. The devil would be in the state specific details IMHO.

 

[Bamaman]

As a retiree, we owe nothing more than a credit card we get travel points on. And it's paid monthly.

No debts, no worries.

MegaCorp required all retirees to take 401K's elsewhere. They obviously were picking up some of the carrying costs to Fidelity. I just rolled them over to a IRA Rollover at Fidelity in the same accounts.

 

[daylatedollarshort]

As a retiree, we owe nothing more than a credit card we get travel points on. And it's paid monthly.

No debts, no worries.

I think the main concern with asset protection laws is from an event like getting sued from a car accident or a worker getting hurt on your property, not being unable to pay your credit card bills.

 

[HawkOwl]

From the web site of this law firm:



It seemed like this might be relevant to your decision, given that not all creditor claims (ie lawsuits) would necessarily result in a bankruptcy. The devil would be in the state specific details IMHO.

For lawsuit protection, does this depend on the law of your state of residency, or the state where the lawsuit was filed? I am envisioning an out of state auto accident scenario.

If you need protection from creditors, does it depend on your state of residency, or the law of the state where the creditor is headquartered?

 

[Sojourner]

Before I go and drain my 401K into an IRA, I've been seeing mentions that a 401K has better legal protection from creditors than an IRA.

Have you looked into how much you are paying (in the form of hidden fees) the 401(k) administrator of your plan? It might be little to nothing, but IME most 401(k) plans tack on extra management fees in addition to the retail expense ratios of the funds they offer. I would look at this as an incentive to roll it over to an IRA where there are no such fees.

Also, I would suggest focusing more on how to protect your assets holistically from legal judgments/seizures. The best way, discussed around here fairly often, is an umbrella insurance policy. Such a policy would cover all assets and would eliminate (or greatly reduce) any worries about the vulnerability of IRAs. Even if your IRA happens to be protected by state law, without an umbrella policy all your other assets aren't and would be the low-hanging fruit in any legal civil judgment.

 

[gauss]

For lawsuit protection, does this depend on the law of your state of residency, or the state where the lawsuit was filed? I am envisioning an out of state auto accident scenario.

If you need protection from creditors, does it depend on your state of residency, or the law of the state where the creditor is headquartered?

Not sure about these questions, but I could envision a third scenario also. Would it be the state where the transgression occurred?

All good questions for an asset protection attorney in your state -- or at least the review of NoLo or other legal book on the topic for those who like to do their homework first.

-gauss

 

[ncbill]

For lawsuit protection, does this depend on the law of your state of residency, or the state where the lawsuit was filed? I am envisioning an out of state auto accident scenario.

If you need protection from creditors, does it depend on your state of residency, or the law of the state where the creditor is headquartered?

Here in the USA how a private creditor can collect a civil judgment against you depends on state law where you are resident.

Here, for example, outside of federally-guaranteed student loans no private creditor can garnish wages.

And here all IRAs of any form (including inherited) are protected from (private) judgment creditors.

As for rolling over a 401k, 403b, etc. to an IRA remember federal protections still apply if you don't co-mingle the rolled-over funds with other funds.

So if you've already got an existing IRA just open a new IRA for to receive the funds from your 401k & don't add to the new account.

 

[daylatedollarshort]

We kept our 401Ks in ERISA accounts up until this year for the asset protection, too. But now the opportunity cost of doing so compared to just paying more for umbrella insurance is too great. And state case law has now made rollover IRAs from 401Ks or private employment plans (not comingled with other funds) fairly bullet proof, too. Most of our 401K fund selections have all been money losers, compared to TIPS and I bonds with 8% inflation adjustments and even 1 year Treasuries over 4% that we can buy in an IRA. I started moving money to the brokerage accounts on the two 401Ks that had them earlier in the year, but now they have either stopped or constrained any further movements to brokerage.

The good news is that the funds with the brokerage options are letting us do partial rollovers and leave the brokerage options in place, so I don't have to sell my TIPS and Treasuries in the brokerages at a loss. We can also preserve the option to move the brokerage money back to the stable values funds at some future point, as in past year they were good deals, just not this year for us.


ETA: I meant the case law favors rollover protections in California now. Each state has their own laws regarding IRAs and asset protections.

 

[ExFlyBoy5]

I would add that although bankruptcy is filed in federal court, protections (specifically amounts that are shielded from creditors) can vary depending on the state in which you reside/file. Also, there are reasons when there are NO protections such as a judgement for negligence if you are drunk and kill someone. The law is not always clear (rarely), so it might be a good idea to contact an attorney in your jurisdiction.

 

[Spock]

Thanks.
I ended up opening a new rollover IRA and moved about 2/3s of the 401K into the rollover IRA.