Is a Roth IRA exempt??
Posted: Mon Feb 25, 2013 2:51 pm
Dennis, et al:
In any 522(b)(3)(C) exemption issue, the code requires that the funds in any
applicable retirement account be tax exempt. In the rollover from pension
to IRA you mentioned, if the pension was not tax exempt due to overfunding
or other failures (most likely seen in self-employed retirement plans), then
the IRA would not be exempt.
This makes me think that when we are dealing with exempting under
522(b)(3)(C), especially with the self-employed, we should be writing CYA
letters which say the exemption is dependent on them being properly
structured and funded under the IRC and any other applicable statutes such
that they qualify for the tax exemption, that we are not qualified to offer
an opinion on that point and they should consult with qualified tax counsel
to insure that the plan is tax exempt and therefore exempt under the
bankruptcy code.
A corollary to this issue recently came up on the NACBA listserv. PC had a
$100,000 windfall that he wanted to exempt. The question was raised whether
he could fund an IRA with the $$ or buy an annuity. Of course the annuity
is no good in CA, but the IRA question implicated two issues:
1. There is a quite low an annual limit on IRA contributions. In 2013 it
is $5.5k ($6.5K if over 50). Thus if the debtor had funded an IRA with a
contribution over the limit, he would have ended up with same problem that
the debtor in Razzano had. Other ERISA plans have higher limits.
2. The other issue is that retirement plans must be funded from earned
income. While there is no tracing issue, the contribution must not be
greater than the amount of earned income.
So now I have convinced myself that I should be asking more questions about
these plans than I previously asked before I take my sweet lambs into
bankruptcy.
If you have any questions or concerns, please contact me.
Pat
Patrick T. Green
Attorney at Law
Fitzgerald & Green
1010 E. Union St. Ste. 206
Pasadena, CA 91106
Tel: 626-449-8433
Fax: 626-449-0565
pat@fitzgreenlaw.com
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