The current aggregate value of retirement assets in America is roughly $21 trillion, with individual retirement accounts (IRAs) amounting to the largest single investment asset.  While many, if not most, types of retirement assets and accounts are protected against creditors, the IRA is not necessarily one of them.  The various protections for IRA are dependent on the amount, how long ago you put the money into your account and the state or jurisdiction you live in.  Employer sponsored plans are covered by protections found in federal law, so it is much easier to talk about what protections exist for such plans.  The Employer Retirement Income Security Act of 1974 (ERISA) created a large host of protections for employees, including protections against creditors, except when the creditor is the Internal Revenue Service (IRS) or a spouse or former spouse for debt incurred through domestic relations.  

The protections found under ERISA have expanded over time through both Congressional action and judicial interpretation of the law.  ERISA plans must provide periodic updates to the employees, information about the plan features, creates fiduciary responsibilities for the plan administrators as well as things such as an appeal process for certain decisions that the employee disagrees with.  One large collective group of accounts that are not protected, however, are IRAs.  IRAs, as the name implies, are owned by an individual and thus do not fall under the protections of ERISA.  Most protections for IRAs are found in state law.  

Federal law protects up to one million dollars in assets in an IRA, but only while in bankruptcy, although there is some disagreement about whether the amount that an employer contributed is protected, of the funds for the IRA were originally from a 401(k) or some -other similar ERISA type account.  While the Supreme Court held that IRAs are protected, the amendment to the bankruptcy code does not single out IRAs.  The Supreme Court concluded that IRAs are considered retirement assets under the Bankruptcy Code since there are penalties if money is withdrawn before the owner is 60 years old.

Fortunately New York and neighboring states, New Jersey and Connecticut all have protect 100 percent of the IRA, so even if you own an IRA and live in New York but work in New Jersey and Connecticut, the protections are, for all intents and purposes, largely the same.  States such as California are much more difficult to pin down as to the full extent of the protections allowed under the law.  

California only protects what is necessary for a reasonable person needs to support themselves.  As such, if you are laid off or change jobs, the idea of rolling over your 401(k) into an IRA has important potential legal consequences.  If you have more than $5,000 in your 401(k), your employer must permit you to leave it there.  While you cannot borrow from it or take early pay outs, it is protected from creditors, even if the company goes bankrupt itself.  It may be best to keep your funds with the previous employer’s 401(k) for that reason alone.  

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