If someone is suing you, hopefully your insurance will kick in to cover not only the costs of the suit but also any judgment the plaintiff receives. But if the judgment exceeds the amount of insurance, the plaintiff will look to your other assets. Whether the plaintiff can reach your Roth IRA depends on the circumstances and your location.
Whether the plaintiff in a lawsuit can reach your Roth IRA depends largely on your state. According to The New York Times, Roth IRA assets are sheltered without limit in most states, including New York, New Jersey and Connecticut. However, some states cap the exemption: Nevada limits it to $500,000, and California law protects only the amount necessary to support the account holder and her dependents. Finally, some jurisdictions, including Virginia, simply apply the same rules as the federal bankruptcy code to claims against assets in the state.
If you file for bankruptcy, up to about $1.245 million in your Roth IRA is protected as of 2013. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 added a provision to the bankruptcy code to protect up to $1 million in an IRA, “without regard to amounts attributable to rollover contributions.” That amount is adjusted for inflation every three years. The law allows the bankruptcy judge to increase the exemption “if the interests of justice so require.”
Even though the asset protection of a Roth IRA is powerful, a creditor who demonstrates a fraudulent transfer or conversion can reach those funds. This could be the case if you placed that money in the IRA to hide it from creditors.The law varies from state to state, but a creditor generally would have to prove that you moved the money into the account with actual intent to “hinder, delay or defraud a creditor.”
Rollovers and Recharacterizations
There are both benefits and pitfalls to rolling other funds into a Roth IRA or recharacterizing a traditional IRA as a Roth. According to The Wall Street Journal, most experts interpret the bankruptcy code’s phrase “without regard to amounts attributable to rollover contributions” to mean that the law protects rollovers to a Roth IRA in any amount. Nevertheless, if someone is suing you or threatening a lawsuit, it might be best not to make any sudden movements, for fear that the plaintiff would attack the rollover or recharacterization as fraudulent.
- The Wall Street Journal: How to Protect 401(k)s and IRAs From Creditors
- The New York Times: Protecting Retirement Accounts From Creditors
- Los Angeles Times: IRAs Could Be Fair Game in Lawsuits
- The Florida Bar Journal: Roth IRA Conversions As an Asset Protection Strategy: Does It Always Work?
- Rack & Olansen: IRAs: Are They Protected From Claims of Creditors?
- Entrepreneur: How the New Bankruptcy Law Affects Your IRA
- Legal Information Institute: 11 USC 522 -– Exemptions
- Bankruptcy Law Network: Federal Register Vol. 78, No. 35
- Uniform Law Commission: Fraudulent Transfer Act Summary
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