May 2, 2017
If I Rollover My 403(b) Into an IRA, Does That Mean I Lose Protection From Lawsuits?
Let’s look at legal documents and tax codes!
So when I started looking into whether I should rollover my 403(b) into an IRA, I found this list of “what to consider before you rollover” from Capital One Investing. (I bank with Capital One and my Roth IRA is with Capital One Investing, which is why they’re playing such a big role in my research.)
Here’s one of the most interesting items on the list:
Protection from Creditors/Legal Action — Most plans have unlimited protection from creditors under federal law, while IRA assets are protected in bankruptcy proceedings only. State laws vary in the protection of IRA assets in lawsuits.
When I typed “Washington State IRA” into Google, the first two autofilled options were “protection” and “protection from creditors,” so clearly I am not the only one curious about this.
A handful of law blogs claim that in Washington State, IRAs and Roth IRAs are protected from creditors, but that wasn’t good enough for me—so I kept searching until I found the Washington State Legislature’s Revised Code (aka “the law”), and now all I have to do is parse it:
(1) It is the policy of the state of Washington to ensure the well-being of its citizens by protecting retirement income to which they are or may become entitled. For that purpose generally and pursuant to the authority granted to the state of Washington under 11 U.S.C. Sec. 522(b)(2), the exemptions in this section relating to retirement benefits are provided.
Great. I can understand that part.
(3) The right of a person to a pension, annuity, or retirement allowance or disability allowance, or death benefits, or any optional benefit, or any other right accrued or accruing to any citizen of the state of Washington under any employee benefit plan, and any fund created by such a plan or arrangement, shall be exempt from execution, attachment, garnishment, or seizure by or under any legal process whatever.
Okay, that covers the 403(b). If I’m reading that correctly, my 403(b) fund is protected from lawsuits and potentially from creditors. (There’s another paragraph explaining that this exemption does not include “child support protection actions,” which does not apply to me but might apply to some of you, so I wanted to mention it.)
Here’s where it gets confusing:
(4) For the purposes of this section, the term “employee benefit plan” means any plan or arrangement that is described in RCW 49.64.020, including any Keogh plan, whether funded by a trust or by an annuity contract, and in 26 U.S.C. Sec. 401(a) or 403(a) of the internal revenue code of 1986, as amended; or that is a tax-sheltered annuity or a custodial account described in section 403(b) of such code or an individual retirement account or an individual retirement annuity described in section 408 of such code; or a Roth individual retirement account described in section 408A of such code; or a medical savings account or a health savings account described in sections 220 and 223, respectively, of such code; or a retirement bond described in section 409 of such code as in effect before January 1, 1984.
Are they saying that the Roth IRA I opened on my own, as well as the Rollover IRA that I might open in a week, count as “employee benefit plans?” Do I need to go read 26 U.S.C. Sec. 408 of the Internal Revenue Code of 1986 as amended?
Yes. Fine. I’m going to go find it.
Okay, so 26 U.S.C. Sec. 408 of the Internal Revenue Code of 1986 is literally a PDF of a typewritten document, uploaded to IRS.gov. It is fifteen pages long and includes a lot of parentheses and references to other codes. However, all it’s really doing is describing “what counts as an individual retirement account,” which does in fact mean IRAs and Roth IRAs.
So, if I am reading all of this correctly: Washington State exempts the assets in employee benefit plans from potential garnishment or seizure as the result of legal action. Washington State also exempts IRAs and Roth IRAs.
I am not a lawyer, which means I could be missing something here, but the LA Times confirms this, as do the law blogs, so… I’m going to assume that I do not lose any protection by rolling over my 403(b).
That means I have just one more question to answer: whether I should roll everything into the same low-cost index fund or split it among a few different low-cost index funds.
That’s what we’ll look at tomorrow.
