What Are the Creditor Protection Rules for Roth IRAs and Roth 401(k)s?

In today's episode, David McKnight breaks down the creditor protection rules for Roth IRAs and Roth 401(k)s, as well as why more and more Americans are turning to tax-free accounts to insulate themselves from creditors… and the Government itself.

In theory, under Federal Law, all IRAs traditional or Roths receive a certain level of bankruptcy protection under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.

However, that protection is specifically tied to bankruptcy proceedings. If you're sued in civil court, the Federal bankruptcy statute doesn't automatically apply, state law takes over…

By pointing out differences between states like Texas, Arizona and Florida on one end, and California and Montana on the other, David explains that whether your Roth IRA survives a potential lawsuit intact depends largely on the state in which you reside.

Roth 401(k)s play by a different set of rules, as they fall under the 1974 Employee Retirement Income Security Act (ERISA).

David notes that "ERISA is the big Federal law that governs most employer-sponsored retirement plans, and it comes with some of the strongest creditor  protection available anywhere in the financial world." 

According to David, it's not hard to see why the Federal Government is going to need huge infusions of new revenue in the very near future.

Wondering how they will be raising that capital? By targeting the nearly $45 trillion in tax-deferred retirement accounts like IRAs and 401(k).

In other words, while your retirement accounts may indeed be largely immune to lawsuits, they're entirely exposed to the impact of rising tax rates.

David points out that contributing to 401(k)s or IRAs is like going into a business partnership with the IRS – every year, they get to vote on what percentage of your profits they get to keep.

Remember: a well-planned Roth strategy doesn't just shield you from tomorrow's higher tax rates, it can also serve as a fortress protecting your wealth from outside claims.

 

 

Mentioned in this episode:

David's new book, available now for pre-order: The Secret Order of Millionaires

David's national bestselling book: The Guru Gap: How America's Financial Gurus Are Leading You Astray, and How to Get Back on Track

Tax-Free Income for Life: A Step-by-Step Plan for a Secure Retirement by David McKnight

DavidMcKnight.com

DavidMcKnightBooks.com

PowerOfZero.com (free video series)

@mcknightandco on Twitter 

@davidcmcknight on Instagram

David McKnight on YouTube

Get David's Tax-free Tool Kit at taxfreetoolkit.com

Bankruptcy Abuse Prevention and Consumer Protection Act of 2005

Employee Retirement Income Security Act of 1974 (ERISA)