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For the most part, it is recommended to merge all of your IRA money together into a single account, to simplify record-keeping, allocation, and paperwork in general. However, there may be circumstances where it could make very good sense to separate your contributory IRAs from 401(k) plan rollovers – and it pertains to creditor’s rights.
If you look at the article Creditor Protection for Retirement Plan Assets, you’ll see that IRAs in general have protection from creditors in the case of bankruptcy, up to $1 million. On the other hand, separated rollover assets from a 401(k) or other ERISA-protected account enjoy indefinite protection from creditors.
Rolling over the ERISA-protected funds into an account that contains contributory IRA funds (that is, an IRA that you have made deductible or non-deductible contributions to) automatically removes the ERISA protection and therefore the indefinite protection from creditors.
So it may make sense for folks who could be impacted by this protection (or rather the removal of the protection) to maintain separate accounts for rolled-over ERISA funds. This would be anyone whose total IRA account is (or may become) over $1 million – and regardless of whether or not you think bankruptcy is a possibility. In today’s sue-happy world, unusual circumstances could creep up on you at any moment and put you in the position where you might need this protection.
It’s very important to note that this protection only applies to actual bankruptcy – if you’re merely being sued by a creditor and you haven’t declared bankruptcy, your protection depends on federal non-bankruptcy law and state law. The article mentioned at the outset includes links to state law information with regard to these kinds of situations.
Sterling Raskie, MSFS, CFP®, ChFC®
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