Qualified retirement plans (here referred to as “qualified plans”) and IRAs are ever increasing in importance in U.S. household wealth. According to the Investment Company Institute, at the end of the second quarter 2009, Americans held approximately $14.5 Trillion in their IRAs and qualified plans, up from $10.5 Trillion at the end of 2002.

IRAs account for more than 10% and qualified plans for 24% of all household financial assets, up from a combined 14% in 1978.  More than 41% of all U.S. households have at least one.  This newsletter discussion continues below a review of the alarming concurrence of courts that inherited IRAs are not asset protected, and explores how Retirement Plan Trusts can provide that asset protection, along with the required distribution rules for these trusts.

ERISA (the federal Employee Retirement Income Security Act of 1974) provides protection from creditors for all qualified plan assets while they remain inside the plan. ERISA’s asset protection for qualified plan distributions, however, depends upon whether the plan is a pension plan (complete protection) or a welfare benefit plan (no protection). Under ERISA, a “pension” plan is any “plan, fund or program which…provides retirement income to employees.” Defined benefit pension, profit sharing, and 401(k) plans are all “Pension” plans under that definition. ERISAs protections are the same in bankruptcy court and outside of bankruptcy. ERISA’s protection also extends to an owner’s IRA assets that were rolled over from a qualified plan.ERISA does not govern IRAs and Roth IRAs. Any non-bankruptcy protection afforded for them comes under state law, which varies widely from state to state. That protection goes all the way from unlimited protection to protection of a specified amount to protection of a court-determined amount reasonably necessary for the debtor and any dependents. Also some state statutes may not protect Roth IRAs or IRAs converted to Roth IRAs.

Bankruptcy law only protects up to $1 Million of IRAs that were not created by rollover from a qualified plan.