BANKRUPTCY PROTECTION FOR RETIREMENT PLANS AND IRAs

Thanks to two new legal developments, investors who file for bankruptcy can now better protect their retirement plan and IRA assets from the claims of creditors. The first development, a unanimous U.S. Supreme Court ruling in early April, makes some IRAs exempt from creditors' claims.

The second development, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, signed by President Bush on April 20, gives investors increased protection for several types of retirement plans previously not shielded from bankruptcy proceedings.

These new developments give IRA investors a degree of protection against creditors that didn't exist before. "Industry statistics show that the average worker changes jobs five to seven times during a career, resulting in many 'orphan' IRAs that investors end up consolidating into a single IRA," says Ray Bellucci, IRA Product Manager. "These new developments provide additional protections for investors who frequently change jobs and want to consolidate their multiple retirement plans into IRAs."

Supreme Court IRA Ruling

According to the U.S. Supreme Court ruling, IRAs can be protected from creditors if the funds are used "for the support of the debtor and any dependent." Essentially, this seems to mean that funds in an IRA may only be protected to the extent an investor in bankruptcy proceedings needs them to pay for financial support. The ruling is likely to be only significant for residents in 16 states (and the District of Columbia) that don't have laws protecting IRAs from bankruptcy proceedings; the remaining 34 states already have state laws that shield residents' IRAs from creditors.

New Bankruptcy Law

Signed into law shortly after the Supreme Court ruling by President Bush, the Bankruptcy Act contains several provisions related to pension and retirement plans. Specifically, the Act extends the bankruptcy protections enjoyed by employment-sponsored retirement plans covered by ERISA, such as 403(b)s and 401(k)s, to plans not subject to ERISA.

Additionally, the Act offers protection from creditors for all retirement assets rolled over to IRAs, and for up to $1 million in contributory and Roth IRA assets, even if the assets are not needed for financial support. The Act also protects Education Savings Accounts and 529 college savings plans, as long as the participant made contributions at least one year prior to bankruptcy, although protected amounts contributed between 365 and 720 days before bankruptcy filing are capped at $5,000, and the account beneficiary must be someone other than the person filing for bankruptcy.

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