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3 Tips to Protect Your IRA From Creditors

Protect Your IRA From Creditors

Protect Your IRA

For many Americans, their retirement account is often their most valuable asset. There is approximately $10 trillion in IRAs (individual retirement accounts) and approximately $30 trillion in overall qualified retirement funds.

How can you protect your IRA from creditors? First, it’s important to remember that creditor protection can depend on whether you have entered into bankruptcy protection or not.

Most often, if an individual IRA holder is not under bankruptcy protection, state law will generally dictate to what degree the IRA will be protected from a creditor attack. In the case of bankruptcy, the 2005 Bankruptcy Abuse Protection Act generally offers a $1 million exemption for IRAs.

Here are three tips to remember to protect your IRA from creditors.

1. Is Bankruptcy an Option?

It’s extremely important to decide whether to elect for bankruptcy protection. This is not a decision you can take lightly. We recommend that you consult with a bankruptcy attorney before you make the decision. With the Bankruptcy Act, your IRA may receive greater protection from creditors inside of bankruptcy than outside of bankruptcy.

If your state has opted into the Act, the law provides debtors in bankruptcy with an exemption for retirement assets in:

  1. Qualified plans
  2. Qualified annuities
  3. Tax sheltered annuities
  4. Self-employed plans

Additionally, the law exempts all assets in an IRA that are attributable to rollovers from a retirement plan described above. If you have a traditional IRA or Roth IRA that contains assets that are not attributable to a rollover from another type of retirement plan (i.e., the assets are from amounts you contributed directly to the IRA), then you may be allowed an exemption of up to $1 million total for the assets in those contributory IRAs.

2. State of Residence

Your state of residency may dictate whether your IRA is protected from creditors outside of bankruptcy. In bankruptcy, your state of residence is also relevant in determine the scope of creditor protection you may receive. This is because some states have opted out of the 2005 Bankruptcy Act.

Whether you are a resident of California, New York or Florida may impact how your individual retirement account is protected from creditors inside or outside of bankruptcy.

Find out whether your state has opted into the 2005 Bankruptcy Act.

3. Self-Directed IRA LLC

The general rule in all states is that creditors cannot take the assets of an LLC to pay off personal debts or liabilities of the LLC’s owners. In other words, if you (IRA owner) owns 100% of an LLC, a creditor of the LLC cannot go after your IRA assets outside of the LLC.

This is one of the benefits of using an LLC that your IRA completely owns.

Charging Order

A “charging order” allows an entity to place a lien and seize money from an individual who owes, but is also owner of an LLC. For example, the individual retirement account.

A charging order is usually one of the only ways a creditor can receive income or profits from an LLC that may otherwise be distributed to the LLC member/debtor.

Creditors with a charging order can only obtain the owner-debtor’s financial rights. They cannot participate in the management of the LLC.

In a single-member LLC, foreclosure on the debtor’s interest may occur in addition to the grant of a charging order. This allows the proceeds to be used to satisfy the creditor’s judgement claim.

In other words, a self-directed IRA LLC can be helpful to protect your IRA from creditors, although a charging order can be a threat to a self-directed IRA LLC and its assets.

However, when you form a self-directed IRA LLC, it could provide an even greater shield against creditor attack.

Nevada LLC law states that the charging order is the exclusive legal procedure that personal creditors of Nevada LLC members can use to get at their LLC ownership interest.

Therefore, unlike some other states, Nevada doesn’t permit an LLC owner’s personal creditors to foreclose on the owner’s LLC ownership interest. Additionally, creditors cannot get a court to order the LLC be dissolved and its assets sold.

As a result, Nevada is seen as a favorable state for individual IRA investors seeking maximum asset creditor protection.

Get in Touch

Do you still have questions on how to protect your IRA from creditors? Contact IRA Financial Group directly at 800-472-0646. We’re here to assist you. Additionally, you can connect with an IRA specialist by filling out the form. 

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