Retirement accounts have become many Americans’ most valuable assets. That means it is vital that you have the ability to protect them from creditors, such as people who have won lawsuits against you.
In general, the asset/creditor protection strategies available to you depend on the type of retirement account you have (i.e. Traditional, IRA, Roth IRA, or 401(k) qualified plan, etc), your state residency, and whether the assets are yours or have been inherited.
Using a Self-Directed IRA LLC will offer you the ability to make a wide range of traditional as well as non-traditional investments, such as real estate, in addition to offering you strong asset and creditor protection. In addition, by using an LLC wholly owned by your IRA, you will also gain another layer of limited liability protection. In this regard, using a Self-Directed IRA LLC to make investments offers you far greater asset and creditor protection versus making the investment personally. For this reason, growing and investing your retirement funds through a Self-Directed IRA LLC is a great tool to protect your retirement assets from creditors, inside or outside of bankruptcy.
Federal Protection for IRAs for Bankruptcy
Like 401(k) qualified plans, The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005(“BAPCPA” or the “Act”) effective for bankruptcies filed after October 17, 2005, gave protection to a debtor’s IRA funds in bankruptcy by way of exempting them from the bankruptcy estate. The general exemption found in section 522 of the Bankruptcy Code, 11 U.S.C. §522, provides an unlimited exemption for IRAs under section 408 and Roth IRAs under section 408A. IRAs created under an employer-sponsored section 408(k) simplified employee pension (a “SEP IRA”) or a section 408(p) simple retirement account (a “SIMPLE IRA”), as well as pension, profit sharing, or qualified section 401(k) Plan wealth transferred to a rollover IRA.
Traditional and Roth IRAs that are created and funded by the debtor are subject to an exemption limitation of $1 million in the aggregate for all such IRAs (adjusted for inflation and subject to increase if the bankruptcy judge determines that the “interests of justice so require”). It is understood that a rollover from a SEP or SIMPLE IRA into a rollover IRA receives only $1 million of protection since such a section 408(d)(3) rollover is not one of the rollovers sanctioned under Bankruptcy Code section 522(n).
Protection of IRAs from Creditors Outside of Bankruptcy
In general, ERISA pension plans, such as 401(k) qualified plans, are afforded extensive anti-alienation creditor protection both inside and outside of bankruptcy. However, these extensive anti-alienation protections do not extend to an IRA, including a Self-Directed IRA, arrangement under Code section 408. Therefore, since an individually established and funded Traditional or Roth IRA is not an ERISA pension plan, IRAs are not preempted under ERISA. Thus, for anything short of bankruptcy, state law determines whether IRAs (including Roth IRAs) are shielded from creditors’ claims.
Note – on June 12, 2014, the Supreme Court unanimously upheld a Seventh Circuit decision that said inherited IRAs do not enjoy the protections of IRAs in bankruptcy proceedings.
The following table will provide a summary of state protection afforded to IRAs, including Self-Directed IRAs, from creditors outside of the bankruptcy context.
|State||State Statute||Special Statutory Provision||State Traditional IRA Exemption from Creditors||State Roth IRA Exemption from Creditors|
|Alabama||Ala. Code §19-3B-508||Yes||No|
|Alaska||Alaska Stat. §09.38.017||The exemption does not apply to amounts contributed within 120 days before the debtor files for bankruptcy.||Yes||Yes|
|Arizona||Ariz. Rev. Stat. Ann. § 33-1126C||The exemption does not apply to amounts contributed within 120 days before a debtor files for bankruptcy.||Yes||Yes|
|Arkansas||Ark. Code Ann. §16-66-220||Yes||Yes|
|California||Cal. Civ. Proc. Code § 704.115||Yes – IRAs are exempt only to the extent necessary to provide for the support of the judgment debtor when the judgment debtor retires and for the support of the spouse and dependents of the judgment debtor, taking into account all resources that are likely to be available for the support of the judgment debtor when the judgment debtor retires.||No|
|Colorado||Colo. Rev. Stat. §13-54-102||Yes||Yes|
|Connecticut||Conn. Gen. Stat. §52-321a||Yes||Yes|
|Delaware||Del Code Ann. § 10-4915||Yes||Yes|
|D.C.||D.C. Code § 15-501(a)(9) & (10)||Yes||Yes|
|Florida||Fla. Stat. Ann. §222.21||The debtor’s IRAs are exempt from creditors, but one Florida court has held that inherited IRAs are not exempt from creditors (Robertson v. Deeb, 16 So. 3d 936 (Fla. 2d Aug. 14, 2009).||Yes||Yes|
|Georgia||Georgia Code Ann. § 44-13-100(a)(2.1)||IRAs are exempt only to the extent necessary for the support of the debtor and any dependent.||Yes||No|
|Hawaii||Hawaii Rev. Stat. § 651-124||The exemption does not apply to contributions made to a plan or arrangement within three years before the date a civil action is initiated against the debtor.||Yes||No|
|Idaho||Idaho Code §§ 11-604A, 55-1011||Yes||No|
|Illinois||I.L.C.S. § 5/12-1006||Yes||Yes|
|Indiana||Ind. Code Ann. § 55-10-2(c)(6)||Yes||No|
|Iowa||Iowa Code Ann. § 627.6(8)(e), (f)||Yes||Yes|
|Kansas||Kan. Stat. Ann. § 60-2308||Yes||Yes|
|Kentucky||Ky. Rev. Stat. Ann. § 427.150(2)(f)||The exemption does not apply to any amounts contributed to an individual retirement account if the contribution occurred within 120 days before the debtor filed for bankruptcy. The exemption also does not apply to the right or interest of a person in individual retirement account to the extent that right or interest is subject to a court order for payment of maintenance or child support.||Yes||Yes|
|Louisiana||La. Rev. Stat. Ann. §§ 20:33(1), 13:3881(D)||No contribution to an IRA is exempt if made less than one calendar year from the date of filing bankruptcy, whether voluntary or involuntary, or the date rights of seizure are filed against the account. The exemption also does not apply to liabilities for alimony and child support.||Yes||Yes|
|Maine||Me. Rev. Stat. Ann. Tit. 14, § 4422(13)(E)||Exempt only to the extent reasonably necessary for the support of the debtor and any dependent.||Yes||Yes|
|Maryland||Md. Code Ann. Cts. & Jud. Proc. § 11-504(h)(1)||Yes||Yes|
|Massachusetts||Mass. Gen. L. Ch. 235 § 34A; 236 § 28||The exemption does not apply to an order of court concerning divorce, separate maintenance or child support, or an order of court requiring an individual convicted of a crime to satisfy a monetary penalty or to make restitution, or sums deposited in a plan in excess of 7% of the total income of the individual within 5years of the individual’s declaration of bankruptcy or entry of judgment.||Yes||Yes|
|Michigan||Mich. Comp. Laws Ann. §§ 600.5451(1), 600.6023(1)(k)||The exemption does not apply to amounts contributed to an individual retirement account or individual retirement annuity if the contribution occurs within 120 days before the debtor files for bankruptcy. The exemption also does not apply to an order of the domestic relations court.||Yes||Yes|
|Minnesota||Minn. Rev. Stat. Ann. § 550.37(24)||Protection limited to $60,000 (adjusts for inflation).||Yes||Yes|
|Mississippi||Miss. Code Ann. § 85-3-1(e)Applies to solo 401k plans||Yes||Yes|
|Missouri||Mo. Ann. Stat. § 513.430.1(10)(e) and (f)||Exemption limited to extent reasonably necessary for support.||Yes||Yes|
|Montana||Mont. Code Ann. §§ 19-2-1004, 25-13-608, 31-2-106||Yes||Yes|
|Nebraska||Neb. Rev. Stat. § 25-1563.01||For IRAs – Limited to the extent reasonably necessary for support.Individual Retirement Accounts are generally protected from attachment and garnishment to the extent the funds contained therein are reasonably necessary for the support of the debtor or any dependent of the debtor. Novak v. Novak, 245 Neb. 366, 513 N.W.2d 303 (1994).||Yes||Yes|
|Nevada||Nev. Rev. Stat. § 21.090(1)(q)||The exemption is limited to $500,000 in present value held in an IRA.||Yes||Yes|
|New Hampshire||N.H. Code Ann. § 511:2, XIX||Yes||Yes|
|New Jersey||N.J. Stat. Ann. § 25:2-1(b)||Yes||Yes|
|New Mexico||N.M. Stat. Ann. §§ 42-10-1, 42-10-2||Yes||Yes|
|New York||N.Y. Civ. Prac. L. and R. § 5205(c)||Yes||Yes|
|North Carolina||N.C. Gen. Stat. § 1C-1601(a)(9)||Yes||Yes|
|North Dakota||N.D. Cent. Code § 28-22-03.1(3)||Retirement funds that have been in effect for at least one year, to the extent those funds are in a fund or account that is exempt from taxation under section 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code of 1986. The value of those assets exempted may not exceed one hundred thousand dollars for any one account or two hundred thousand dollars in aggregate for all account.||Yes||Yes|
|Ohio||Ohio Rev. Code Ann. § 2329.66(A)(10)(b) and (c)||SEP and SIMPLE IRAs are not protected.||Yes||Yes|
|Oklahoma||31 Okla. St. Ann. § 1(A)(20)||Yes||Yes|
|Oregon||42 Pa. C.S. §§ 8124(b)(1)(vii), (viii), (ix)||Yes||Yes|
|Pennsylvania||42 Pa. C.S. §§ 8124(b)(1)(vii), (viii), (ix)||100%, except for amounts (1) contributed within 1 year (not including rollovers), (2) contributed in excess of $15,000 in a one-year period, or (3) deemed to be fraudulent conveyances.||Yes||Yes|
|Rhode Island||R.I. Gen. Laws § 9-26-4(11), (12)||Yes||Yes|
|South Carolina||S.C. Code Ann. § 15-41-30(12)||IRA exemption limited to the extent reasonably necessary for support. For Solo 401(k) Plans, not limited to the extent reasonable necessary for support.||Yes||Yes|
|South Dakota||S.D. Cod. Laws §§ 43-45-16||Exempts “certain retirement benefits” up to $1,000,000.||Yes||Yes|
|Tennessee||Tenn. Code Ann. § 26-2-105||Distributions 100% exempt to the extent they are on account of age, death, or length of service and debtor has no right or option to receive other than periodic payments at or after age 58.||Yes||Yes|
|Texas||Tex. Prop. Code § 42.0021||Yes||Yes|
|Utah||Utah Code Ann. § 78-23-5(1)(a)(xiv)||The exemption does not apply to amounts contributed or benefits accrued by or on behalf of a debtor within one year before the debtor files for bankruptcy.||Yes||Yes|
|Vermont||12 Vt. Stat. Ann. § 2740(16)||Yes||Yes|
|Virginia||Va. Code Ann. § 34-34||Limited to interest in one or more plans sufficient to produce annual benefit of up to $25,000 (pursuant to actuarial table in statute).||Yes||Yes|
|Washington||Wash. Rev. Code § 6.15.020||Yes||Yes|
|West Virginia||W. Va. Code § 38-10-4(j)(5)||Principal 100% protected. Exemption for distributions limited to the extent reasonably necessary for support.||Yes||No|
|Wisconsin||Wisc. Stat. Ann. § 815.18(3)||Yes||Yes|
|Wyoming||Wy. Stat. Ann § 1-20-110(a)(i), (ii). No statutory exemption for IRAs. – only mentions retirement plans||No statutory exemption for IRAs. – only mentions retirement plans||No||No|
IRA Asset Protection Planning
The different federal and state creditor protection afforded to 401(k) qualified plans and IRA, including Self-Directed IRAs, inside or outside the bankruptcy context presents a number of important asset protection planning opportunities.
If, for example, you have left an employer where you had a qualified plan, rolling over assets from a qualified plan, like a 401(k), into an IRA may have asset protection implications. For example, if you live in or are moving to a state where IRAs are not protected from creditors or have in excess of $1million dollars in plan assets and are contemplating bankruptcy, you would likely be better off leaving the assets in the company qualified plan.
Note – If you plan to leave at least some of your IRA to your family, other than your spouse, the assets may not be protected from your beneficiaries’ creditors, depending on where the beneficiaries live. IRA assets left to a spouse would likely receive creditor protection if the IRA is re-titled in the name of the spouse. However, you will likely be able to protect your IRA assets that you plan on leaving to your family, other than your spouse, by leaving an IRA to a trust. To do that, you must name the trust on the IRA custodian Designation of Beneficiary Form on file.
The IRA Asset & Creditor Protection Solution
By having and maintaining an IRA, you will have $1 million of asset protection from creditors in a bankruptcy setting. However, the determination of whether your IRA will be protected from creditors outside of bankruptcy will largely depend on state law. As illustrated above, most states will afford IRAs full protection from creditors outside of the bankruptcy context.