Can creditors get my money if I roll my 401(k) to an IRA?


Q. Do I need to worry about creditors if I roll my 401(k) to an IRA?
— Concerned

A. Some people, yes, will have to worry about creditors when it comes to their IRA.

The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005 provides federal bankruptcy protection for IRAs, but only if for accounts with certain balances.

Only IRA account balances of less than $1,362,800 in 2021 are protected, said Jeanne Kane, a certified financial planner with JFL Total Wealth Management in Boonton.

“If your account is larger than the limit, then you are only protected for the amount below that. Anything above is fair game for creditors,” she said. “If your account is smaller than the limit, then your IRA has full protection.”

But, she said, if you transfer your 401(k) into a rollover IRA, the BAPCPA fully shields the account from creditors in bankruptcy, no matter the balance.

She said rollover IRAs have the same creditor protection as your 401(k).

Keep in mind that a rollover IRA is treated the same as an IRA, she said. You’ll have the same investments available to you and will have the same tax treatment.

It’s important that you don’t mingle regular IRA money with funds in a rollover IRA account, she said.

“Should you ever file for bankruptcy, having the monies mixed can make an already stressful situation more complicated,” she said.

Also, by keeping your rollover IRA solely for 401(k) funds, you have the added bonus of transferring the account into a future employer 401(k) should that opportunity arise, she said.

“When you move your money from your 401(k) into another account, ideally a rollover IRA, you should look to do a trustee-to-trustee transfer from one account to another,” Kane said. “This simply means that the funds go from the 401(k) and are payable to the new financial institution for your benefit.”

This is a non-taxable process, she said.

Also be aware of the 60-day rule.

If you do a rollover and a check is mailed to you, you have to put the funds in the new account within 60 days otherwise the IRS will treat it as a fully 100% taxable distribution, Kane said. And if you were under 59 ½ you’ll add a 10% penalty on top, she said.

“You can only do one rollover per year. The number of trustee-to-trustee transfers is unlimited,” she said. “So, if you transfer your account to a new financial institution and you’re not happy, a trustee-to-trustee transfer gives you the flexibility to move it again.”

Email your questions to .

This story was originally published on Feb. 1, 2021. presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.