OJ Simpson has a 4 million dollar defined benefit plan (pension plan) and despite the fact that he has a 33 million dollar judgement against him for the murders he has allegedly committed, the victims are never going to see a penny of it because OJ’s money is sheltered in a retirement account. Even a judgement against you for murder cannot pierce through a retirement plan and access the funds in it. A lot of people don’t realize that their assets are protected when in a retirement account up to an unlimited dollar amount against creditors or in bankruptcy proceedings. So if you have to go bankrupt for whatever reason whether it be medical or a business loss or a lawsuit, the money you have in a retirement account cannot be touched.
So OJ has a defined benefit plan but most of us have defined contribution plans (401(k), 403(b) or 457) but the asset protection guarantees carry over to these plans too. In an event a participant switches jobs, he or she can rollover their existing balance to a Rollover IRA and keep the same asset protection. But caution is in order. The Rollover IRA should only hold assets rolled over from an employer sponsored plan or plans and if that is the case, the protection from creditors is again unlimited. But if you co-mingle personal contributions to this IRA in the form of making a traditional IRA contribution for a given year (you can make traditional IRA contributions to a Rollover IRA), then that protection is no longer unlimited. So if you have got a big 401(k) or multiple 401(k)s and you are going to roll money from those accounts, don’t co-mingle that money with monies that you put into an IRA from your personal account.
Pure, not co-mingled Rollover IRA aside, the level of protection from creditors is much different for the other three types of IRAs. The first type is the IRA that is comprised of only traditional IRA contributions, the second is the IRA that is comprised of rollovers from an employer sponsored plans and personal IRA contributions, namely the co-mingled type and third is the after-tax Roth IRA. A 2005 law determined that assets in these three types of accounts will be protected at the maximum rate of 1 million dollars, adjusted for inflation. So that’s $1,283,025 today. Anything over that in any of these IRAs is not protected from the claims of creditors.
Fortunately or unfortunately, most folks at least in the Valley with the incomes they derive are ineligible to make traditional IRA contributions so you are not going to be facing this issue. But if you are eligible and intend to make traditional IRA contributions, do that in an account separate from the Rollover IRA account.
So that’s clear.
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