The panic over Covid-19 led to the close down of the largest economy in the world. The consequence was a wave of business closures, bankruptcies and lawsuits. Can individuals or small business owners facing bankruptcy lose everything? Depends. Retirement accounts carry different protections shielding employer retirement plans and IRA from bankruptcy and (non-bankruptcy situations) creditors. Layers of protection also vary from state to state. What types of accounts do you hold and what protection do you have? Employer sponsored retirement 401(k) plans fall under the ERISA guidelines and receive both bankruptcy and creditor (non-bankruptcy claims) protection. To illustrate, say Mark is a building contractor who has 401(k) plan set up for himself and his employees under his S-Corp. The plan balance holds $1.5M. Recently there was an accident on one of his sites and Mark is being sued personally. Even if Mark loses the lawsuit, the assets inside the 401(k) are protections by ERISA, unlimited. If Mark failed to have sufficient personal liability, his 401(k) would be off limits to bankruptcy settlements and creditors.
Business owners having a SOLO 401(k) in place are not covered by ERISA, so while they will have bankruptcy protection under the bankruptcy code, they do not have the same credit protection for non-bankruptcy claims. This is also the case with other non-ERISA covered plans such as SEP IRA, SIMPLE IRA, 403(b) or 457(b) plans.
There is good news for Georgia residents. Creditor protection is at the mercy of state law and according to Georgia statute 44-13-100 (2.1)(D) Georgia residents receive unlimited creditor protection on non-ERISA covered account balances. However, once dollars come out of the account protection is lost; this includes RMDs, with an exception given for support payments for debtor and dependents.
Well, what about traditional contributory IRAs and ROTH IRA non-deductible contributions and appreciation? They receive bankruptcy protection under Federal law up to an inflation-adjusted cap (currently $1,362,800 YR2020).
An unexpected relief comes from learning that rollover dollars into IRAs coming from ERISA qualified employer retirement plans and non-ERISA plans such as SEPs and SIMPLEs are granted full unlimited bankruptcy protection.
What about personal lawsuits and creditor claims pertaining to IRAs and non-ERISA plans? As mentioned above, Georgia residents receive unlimited creditor protection on IRA and non-ERISA covered account balances.
In a landmark case decision in 2014, it was ruled that inherited IRA assets are not protected from bankruptcy under federal law. But, Georgia residents do, however, receive unlimited creditor protection on inherited IRA and non-ERISA covered account balances as long as the assets have not been distributed out of the account, with an exception given for support payments for debtor and dependents.
