The Trap of Rollover IRA Accounts/California Law and the New Bankruptcy Law |
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| Practice Area - Bankruptcy | |
| In
California, company pension plans, government pension plans, 401(k)
plans and 403(b) plans (for non-profit organizations) are not reachable
by creditors, whether in bankruptcy proceedings against the Debtor
or in state court proceedings. All of the funds in those accounts go
to the employee. Over the past several years, private employers have
largely replaced the traditional pension plans with 401(k) plans. All
of these plans are exempt from creditors, meaning that creditors may
not attach or otherwise obtain any portion of those funds.
A traditional IRA account, on the other hand, is not exempt from creditors and is exempt only to the extent necessary to provide for the person’s support when he or she retires and for the support of the spouse and dependents, taking into account all resources that are likely to be available for their support upon retirement. Roth IRA accounts are given the saem treatment. In the past few years, with the increasing use of 401(k) plans as the sole basis for retirement plans being offered by companies, there have been an increasing number of “roll over” IRAs, which can occur when the plan is terminated, or the employee terminates employment and does not elect to remain in the 401(k) plan. In order to avoid immediate taxation, typically these funds are “rolled over” into an IRA account within 60 days of plan termination. California law could be interpreted to provide that all of the funds that were once completely exempt in the 401(k) plan remain exempt to the extent that the funds can be traced. However, a California Bankruptcy Court has ruled that rollover IRA plans do not remain exempt and are treated no differently than a regular IRA account. In that case, the employee had worked for Southern California Edison for an extended period of time. He opted for early retirement and rolled over his retirement funds to the rollover IRAs accounts. He had approximately $483,000 in his two IRA accounts. Had he kept his funds in his company retirement plan and not opted for early retirement, he would have been allowed to retain all of the funds in the retirement plan. Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, IRA accounts are exempt up to $1,000,000. California has not made this provision part of state law; therefore the rollover IRA issue remains concerning State Court attachments or judgments. |