That was a big unanswered question on the minds of financial advisors and many IRA owners throughout Alabama until recently. Now advisors can confidently tell their clients that their IRA is protected against the claims of creditors.
Unlike 401k and similar plans which are protected from creditors under federal law, IRAs, if protected at all, are protected under state law. This means every state must enact its own legislation to protect IRAs from creditors.
The Financial Planning Association of North Alabama, lead by members Fergus Touhy CFP®, Jeff McCormack CFP® and Joe Stephens CFP®, took on the challenge of making legislative changes that make it perfectly clear that your hard-saved retirement accounts are protected from creditors. Amanda Senn, General Counsel for the Alabama Securities Commission, was instrumental in providing guidance on how the legislative process works in Montgomery.
Key legislators, House Representative David Faulkner, Senator Slade Blackwell, and Senator Jabo Waggoner, worked tirelessly to bring the bill to a vote which passed almost unanimously in both the House and Senate.
“This was a good bill for the people of Alabama and I was happy to sponsor this legislation and help with its passage. The primary purpose was to clear up any confusion that may have existed under Alabama law that retirement benefit plans not already protected under federal law, such as IRAs and HSAs, are also afforded the same protection from creditors. The bill also specifically provides for spousal rollovers to be protected, and makes sure a convicted felon does not have such protection. I was proud to sponsor this legislation and I thank the Financial Planning Association of North Alabama for reaching out to me about this area of our law that needed revision.” Rep. David Faulkner, Alabama House of Representatives.
The bill was signed by Governor Ivey on May 18th.
Here is what you need to know:
- What types of plans are covered? Traditional IRAs, Roth IRAs, SIMPLE plans, Simplified Employee Pensions (SEPs) and Health Savings Accounts (HSAs).
- What’s not covered? This creditor protection extends to spouses who rollover a deceased spouse’s retirement account but does not extend to non-spouse beneficiaries such as children. The creditor protection also does not apply to a convicted felon who is required to pay restitution.
Why convert your 401k to an IRA?
- More investment choices. Most 401k and similar employer-based plans limit investment options to less than two dozen choices. By rolling over your retirement account into an IRA at a custodian such as Schwab, Fidelity or other major broker, your investment options become almost unlimited. You’re also able to invest in individual stocks and bonds, ETFs and a variety of investments not available under employer retirement plans.
- Less expenses. Expenses vary widely, but often you can significantly reduce expenses through an individual rollover IRA.
- Less hassle. Most large custodians such as Schwab provide easy-to-use online tools for service requests such as beneficiary changes, requesting withdrawals, address changes, etc. Those same changes can be quite a hassle when you have to go through your employer’s human resources department.
If you own an IRA or other covered plan, you owe these legislators and key people of influence a big “Thank you!” the next time you see them.
Since everyone’s facts are different, be sure to consult with your own professional advisor before making any changes to your retirement plans.