Roth IRAs are Individual Retirement Accounts (IRAs) that protect your retirement savings from taxation during your working years. However, if you are sued, you must understand what protections you have and what limits are imposed on IRAs. Your Roth IRA does provide some protections, but they depend on the type of lawsuit in which you are involved.
Your Roth IRA is protected from lawsuits involving bankruptcy under the Bankruptcy Abuse Prevention and Consumer Protection Act. This act protects up to $1 million of your IRA. Any amount over this may be subject to collection. For other types of lawsuits, the court decides how much of your IRA will be subject to collection.
The benefit of a Roth IRA is that it provides more protection than not having an IRA at all. If you must file bankruptcy, you have at least $1 million that won't be touched. This might preserve all of your Roth IRA. If your Roth account has significant funds, with at least some protection for the account, you won' have to start all over again saving for your retirement.
The disadvantage of protections extended to Roth IRAs is that they are very limited. The Roth IRA is not wholly protected from lawsuits involving anything other than bankruptcy. If you are sued for any other purpose, this means you could lose all of your IRA to a creditor.
You might want to consider a 401(k) plan for enhanced asset protection if your employer offers one. A Roth 401(k) plan would provide benefits similar to your Roth IRA. A 401(k) plan is wholly protected from creditors. The only exception to the protections afforded 401(k) plans is back taxes. The IRS may collect from a 401(k) plan. But, the IRA isn't protected from the IRS either, so with a 201(k), you will still be gaining an advantage over a Roth account.
- "Practicing Financial Planning for Professionals (Practitioners' Edition), 10th Edition"; Sid Mittra, Anandi P. Sahu, Robert A Crane; 2007
- IRS: Publication 590
- WSJ,com: How to Protect 401(k)s and IRAs From Creditors
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