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When NOT to Roll Over Your Company Retirement Plan Money to an IRA

IRA rollover creditor protectionWhen you switch jobs or retire, you are generally entitled to a full distribution from your company retirement plan funds such as a 401(k). You must be given the option to roll over those funds to an IRA. Certainly, a rollover to an IRA is a great decision most of the time. A direct rollover to an IRA is tax-free and keeps your retirement funds intact and growing on a tax-deferred basis.

Another advantage to the IRA rollover is that you can create a stretch IRA for your beneficiaries. So when you do the IRA rollover and then name your children or whomever as the beneficiary of your IRA, your beneficiaries won’t be forced to take a total distribution of the funds. They will be allowed to stretch the IRA distributions over their own single life expectancy.

But in some cases you may not want to roll over your company retirement plan funds to an IRA. One potential reason to leave the assets in your employer retirement plan is for federal creditor protection. Federal law protects your funds from your creditors while it’s inside the company plan. If, for example, you have creditor problems or are a business owner or physician who is worried about lawsuits, you may want to leave the funds in the company plan to shield them from creditors (note: to qualify for federal creditor protection the plan must have employees other than the business owner).

If you roll over company retirements funds to an IRA, federal law does NOT protect your IRA from creditors. Your IRA might be protected by state law, but this protection, if any, varies from state to state. So, before you do the rollover, you may want to find out if your state protects IRAs from creditors.

Federal law does protect your IRA in bankruptcy up to $1,245,475. Employer plan funds in an IRA receive unlimited protection. This is for bankruptcy only; not for other types of judgments such as lawsuits and creditors.

- By Joe Cicchinelli and Jared Trexler


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Thursday's Slott Report Mailbag

Consumers: Send in Your Questions to [email protected]

You recently said that a 401(k) distribution would add to your MAGI (modified adjusted gross income) for the purpose of determining if you are subject to the 3.8% healthcare surtax. What about Roth IRA distributions? Would they also count towards your total MAGI income for surtax purposes?


IRA distributions are exempt from the 3.8% surtax, but taxable distributions from IRAs can push income over the threshold amount, causing other investment income to be subject to the surtax. Because Roth IRA distributions are generally tax-free, they don’t count towards your total MAGI.