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Any reason for 401K/403B rollover to T-IRA be a segregated account
There are good reasons to keep all 401k/403b rollovers into a separate T-IRA. It is OK to have all rollovers into one T-IRA. But putting them in T-IRAs with personal contributions can lead to complications in bankruptcy or lawsuits.
Basically, widely varying state laws apply to contributory T-IRAs (some generous, others not so). Federal rules/protections apply to 401k/403b rollover funds. A mixed/tainted T-IRA can lead to frozen T-IRA a/c in bankruptcy or lawsuits.
Simplification or saving some annual fee for T-IRAs are not good reasons to create a giant but messy T-IRA.
Hi @yogibearbull I was aware of protections with active 401K/403B accounts, but was not aware that possible similar protections may apply to rollovers into a T-IRA account. Thank you. Catch
Yes, most federal protections of 401k/403b carryover to their rollovers to T-IRAs. Some lawyerly type posters have argued that the courts/judges/lawyers can sort out funds within a mixed/tainted T-IRA, but then there is the risk that entire T-IRA can be frozen as things are being sorted out at T-IRA owner's expense.
Federal protection extends only to bankruptcy proceedings, not to creditor lawsuits. To understand this, it helps to see where protections come from.
Protection of money in employer sponsored plans comes from ERISA, which has a virtually ironclad antialienation provision. That means that you cannot pledge or have taken from you any money within the retirement plan for almost any reason.
Protection of rollover money in an IRA comes from the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). As one might gather from its name, this protection applies only if you declare bankruptcy. It doesn't protect IRAs in "regular" creditor lawsuits.
For "lawyerly type" readers, here's a remarkably clear and concise page (just 4 paragraphs plus a couple more sentences) from a law firm saying much the same thing.
Outside of bankruptcy, traditional contributory IRAs and Roth IRAs and inherited IRAs, have protection only under state law.
(The bankruptcy protection applies to all forms of IRAs, not just T-IRAs.)
With respect to keeping rollover money segregated for bankruptcy protection, it may help but it isn't a cure-all. "Rollover IRA" is just a label for convenience. One can add contributory money to a "rollover IRA" without the IRA custodian removing that label. So if a creditor comes after your assets, it might still challenge your assertion that the rollover IRA contains only rollover money.
Comments
Basically, widely varying state laws apply to contributory T-IRAs (some generous, others not so). Federal rules/protections apply to 401k/403b rollover funds. A mixed/tainted T-IRA can lead to frozen T-IRA a/c in bankruptcy or lawsuits.
Simplification or saving some annual fee for T-IRAs are not good reasons to create a giant but messy T-IRA.
I was aware of protections with active 401K/403B accounts, but was not aware that possible similar protections may apply to rollovers into a T-IRA account.
Thank you.
Catch
Federal protection extends only to bankruptcy proceedings, not to creditor lawsuits. To understand this, it helps to see where protections come from.
Protection of money in employer sponsored plans comes from ERISA, which has a virtually ironclad antialienation provision. That means that you cannot pledge or have taken from you any money within the retirement plan for almost any reason.
Protection of rollover money in an IRA comes from the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). As one might gather from its name, this protection applies only if you declare bankruptcy. It doesn't protect IRAs in "regular" creditor lawsuits.
For "lawyerly type" readers, here's a remarkably clear and concise page (just 4 paragraphs plus a couple more sentences) from a law firm saying much the same thing. https://www.rosenblattlawfirm.com/blog-post/creditor-protection-of-retirement-plan-assets/
(The bankruptcy protection applies to all forms of IRAs, not just T-IRAs.)
With respect to keeping rollover money segregated for bankruptcy protection, it may help but it isn't a cure-all. "Rollover IRA" is just a label for convenience. One can add contributory money to a "rollover IRA" without the IRA custodian removing that label. So if a creditor comes after your assets, it might still challenge your assertion that the rollover IRA contains only rollover money.