President Bush signed into law the Bankruptcy Abuse Prevention and Consumer Act of 2005 ("The Act") on April 20, which will broaden IRA protection from bankruptcy proceedings once The Act becomes effective.
The bankruptcy legislation represents the largest overhaul to the bankruptcy system since 1978. One of the provisions of the act provides bankruptcy protection for IRA assets held in both traditional and Roth IRAs from bankruptcy creditors.
The protection provided by the act will be available to all IRA account holders regardless of which state they reside in (even though is certain states the bankruptcy protection is broader than that provided by the act and residents of those states can still use those protections).
For states that provided limited bankruptcy protection for IRAs, the act will provide residents of those states significant bankruptcy protection for the first time.
The act limits the exemption provided to $1 million in nonrollover IRA assets. Eligible rollovers are protected from bankruptcy without any dollar limitation.
The $1 million limitation only to traditional IRAs or Roth IRAs; it does not affect SEPs, One Person 401(k)s or other qualified retirement plans.
New opportunities provided by the legislation
As a result of the act, qualified plan owners are presented with a new opportunity.
In the past there was a reluctance for qualified plan owners to roll their assets into an IRA from a qualified plan as the qualified plan provided greater protection from bankruptcy.
With this impediment removed, it may make sense now to roll from a qualified plan to an IRA, to receive greater flexibility when investing your retirement assets.
When the assets are held in a qualified plan, your choices are generally limited to the investments selected by the plan administrator.
When assets are held in an IRA, the account holder has the ability to invest in a much broader spectrum of investment choices including stocks, bonds, mutual funds and other types of investments.
Additionally, if you have a nonspouse beneficiary on your retirement account, the beneficiary will have the ability to stretch out the distributions over his or her life expectancy when the money is held in an IRA.
While the new legislation protects IRA holders from bankruptcy, it does not protect IRAs from other creditors.
An IRA's protection from other creditors is determined under state law.
Assets held in a qualified plan receive protections from other creditors under the Employee Retirement Income Security Act (ERISA).
This is a factor to consider before rolling qualified plan assets to an IRA.
The new legislation provides IRA accountholders with new potential opportunities. It is important to review your own situation with your tax advisor to determine what is best for you.
For more specific information, I would suggest contacting an attorney well versed on the state of Nevada's position relative to bankruptcy exemptions. I can be reached at 689-8704 or William.firstname.lastname@example.org.
n William Creekbaum, MBA, CFP, a Washoe Valley resident, is senior investment management consultant of SmithBarney, a financial services firm serving Northern Nevada at 6005 Plumas Street, Ste. 200 Reno, NV 89509.