Protecting Your IRA from Creditors or Lawsuits

Though born the son of slaves and reared by his master, George Washington Carver earned a degree in agriculture in 1896 and worked for the Bureau of Plant Industry at the U.S. Department of Agriculture, specializing in the industrial uses of the peanut. He lost his entire life savings ($70,000) when his Alabama bank went bust during the Great Depression, but Carver remained surprisingly unperturbed. “I guess somebody found a use for it,” he later declared. “I was not using it myself.”

Most of us are not as nonchalant as George Washington Carver about our life’s savings. In an age when the corporate pension is disappearing and retirements last 30 years or more, people are very concerned about protecting their nest egg from bankruptcy courts and creditors. Maryland residents are fortunate because Maryland laws shield IRAs from bankruptcy courts and creditors to a greater degree than does Federal law.

In past newsletters, we have recommended that clients roll over employer retirement plans—401(k), 403(b), 457, and SEP IRAs—at former employers to an IRA (see October 2007 and Winter 2005 issues). We make this recommendation because we want to get our greedy little hands on every penny you have. No, really, there are several reasons: IRAs have lower fees and more investment options, and they allow consolidation of retirement accounts, which simplifies and improves management of the money.

However, some clients are reluctant to move funds from their former employer’s retirement plan because they have heard that IRAs are not protected from creditors and/or not protected in the case of bankruptcy.


Are IRAs Protected?

As with all things IRA, a little background is in order. In 1992, the U.S. Supreme Court held that retirement plans covered by the Employee Retirement Income Security Act of 1974 (ERISA) are excluded from bankruptcy estates. In most cases, this protection also extends to protection from creditors. In other words, you do not have to hand over your retirement savings to a bankruptcy court or to creditors.


IRAs (Roth and traditional) are not covered by ERISA. In 2005, President Bush signed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). The law extends the same protection as ERISA plans to traditional and Roth IRAs and most other tax-exempt funds. But there is a $1.0-million cap, and BAPCPA only applies to bankruptcies and not to other claims or lawsuits.

It gets more complicated (and that’s why BAPCPA is jokingly referred to “Bankroll A Porsche for a CPA”). The $1.0-million cap does not apply to a rollover from an employer retirement plan to an IRA. Therefore, the entire rollover amount is protected. You may remember being advised to roll over your employer retirement plan to a “Rollover IRA.” The reason was to make your $1.0-million cap easier to track.

Enter the 50 states. Some states have opted out of BAPCPA. If your state opted out, you must look to your state’s law for guidance. In Maryland, any retirement plan deemed by the IRS as a tax-deferred retirement plan is excluded from your bankruptcy estate and the claims of creditors. There is no limit to the amount exempted. In other words, in Maryland, your retirement funds are protected to a greater degree than under Federal law.

In Maryland, this removes a hurdle to rolling over your former employer’s retirement fund to an IRA. You can take advantage of the benefits of an IRA without concern that your retirement savings will be taken in a bankruptcy or by the claims of creditors. If you have a question about the laws in your state, please contact Mark Stinson.