Found the Roth IRA X Factor

[eltaur2000]

I found a way to legally protect cash before filling chapter 13th. It will be max $5,000 but that is technically all I will have.

You can open a Roth IRA at Fidelity or Vanguard and fund the account with the max of $5,000. It will not count for the liquidation test because it's exempt.

You can withdraw the amount YOU contributed penalty free anytime. I'm assuming if you have this cash in a Savings or Checking you would have already paid taxes. The max you can deposit for year is $5,000.

Instead of playing poor me and criticizing other people in the forum I want to share useful information. Or telling people they need to read better let me give you useful information.

You can save your cushion in a Roth and not have it used for the liquidation test.

[HHM]

This isn't exactly news? But thank you for posting.

However, there is a 10% early withdrawal penalty if you remove funds from a Roth IRA unless certain exceptions apply.

[ValleYum]

@HHM: So the OP can place $5,000 into a brand new Roth IRA (with no history of ever having done this before) on the eve of filing a Chapter 13 and it won't be considered bad faith by the Trustee?

@eltaur2000: Wow. The poster you are being all snarky towards merely invoked her Constitutional right to file bankruptcy. By the way, it is the very same right you are currently considering the use of.

While we may not agree with everything others say on this forum, when those of us who use our personal time to try to help others see posts that concern us - whether it be about an exemption, preparedness to file or yes, a pre-BK trip to Vegas - we give opinons. What you need to remember is the opinions and advice given is done with the hopes that it helps another person. It may not be what one wants to hear but it may be exactly what one needs to hear.

Quite simply, by virtue of posting here, we are all in the same glass house of debt - yourself included. No one should be throwing stones at the people who are simply trying to understand and/or help.

Not everything being said to you is a direct attack on you but your 'sensitivity phasers' are set to stun and you seem (from prior posts) to get all rage-face when you get an answer that isn't to your liking. Just saying. Because not only is having all that anger not healthy; it tends to make others not want to help the angry person.

[HHM]

@HHM: So the OP can place $5,000 into a brand new Roth IRA (with no history of ever having done this before) on the eve of filing a Chapter 13 and it won't be considered bad faith by the Trustee?

Mostly, yes. The person first needs to be eligible to open the IRA, which means the person must have "earned income" (e.g. wages). That little nugget has caused problems for the unemployed or retired debtor filing bankruptcy that have cash on hand, the person puts the funds in an IRA, and the trustee is able to undue the transfer because the unemployed person was not eligible to open an IRA.

However, Pre-bankruptcy exemption planning is OKAY. The leading opinions on the issue tend to favor the debtor and hold that the mere act of converting non-exempt funds into exempt funds, by itself, is not evidence of fraud (evidence of an intent to hinder, delay, or defraud creditors). The courts want to see more evidence of fraud. For example, if the person opened an IRA, put $20,000 into it, the IRA is in an off shore bank, and the debtor failed to disclose the account on the petition (but was later discovered) that would be fraud.

[despritfreya]

I found a way to legally protect cash before filling. . . You can open a Roth IRA. . . with the max of $5,000. It will not count for the liquidation test because it's exempt. . .You can save your cushion in a Roth and not have it used for the liquidation test.

Interestingly, this is correct under Illinois law and for many other states as well as Federal exemptions. However, the generalization needs to be qualified. Some states have limitations. For example, in Arizona, contributions made to such an IRA account within the 120 days prior to filing bk are not protected.

Des.

[ValleYum]

Thanks for the answers HHM & Des!! Appreciate the knowledge as always!

[mountanddo]

What if you withdraw those funds during an active Chapter 13? Wouldn't that be considered income and subject to adding to your DMI?

[justbroke]

Withdrawing money from any retirement account, in an active Chapter 13, is not income.

As already stated, people need to be aware of the very specific conditions for moving money from non-exempt to exempt assets. This is why I always suggest some asset protection consultations. Bankruptcy pre-planning is perfectly fine!

[despritfreya]

What if you withdraw those funds during an active Chapter 13? Wouldn't that be considered income and subject to adding to your DMI?

Theoretically it could, but who would know? You would have to report the early withdrawal on the tax return, pay the penalty and any income tax, but, the reality is this:

Once your Chapter 13 Plan is Confirmed, even if you have to supply tax returns to your Trustee on an annual basis, the Trustee's office is not likely to even look at them. Once the Plan is Confirmed, unless you have to file some Motion with the Court, your file is put away and the Trustee's office moves on to other files. So, if you don't rock the boat after Confirmation, it is unlikely that a Trustee will pick up on income fluctuations.

Des.

[justbroke]

I have withdrawn money from a 401(k) during an active Chapter 13 without any issues. It may be a Trustee thing, but Chapter 13 Trustees are really about seeing you make it to the end. As my Trustee told me... "I don't make money unless you are successful!"

[despritfreya]

Withdrawing money from any retirement account, in an active Chapter 13, is not income.

The more I think about this the more I have to agree with JB, especially if the Plan is Confirmed. Once the money is removed from the IRA it is no longer "exempt" hence the reason for my “theoretical” comment. However, if the Plan is Confirmed, unless the Order Confirming states otherwise, property of the estate vests in the debtor and the debtor may use such property as necessary. Therefore, an early withdrawal from the IRA after Confirmation would not be "disposable income" - even on a theoretical basis.

Des.

[justbroke]

And to add more information... I was in a confirmed Chapter 13 and my plan vested all property back to me upon confirmation. The following was one of the provisions in my Confirmed Chapter 13 Plan of Reorganization.

All property shall revest in the Debtor upon confirmation of the Plan (11 USC § 1327(b)).

[mountanddo]

Good information. Thanks JB and Des.

[alo]

I know this post is a little old but I had a medical procedure in 2011 and withdrew $12K from my Roth IRA to pay for it. I am now looking at receiving a tax return for about 5K from 2010. I was concerned that this would count as income since I plan to file BK shortly. But, now I am wondering if I can just deposit it back into my Roth IRA as a repayment. Thoughts?

[justbroke]

I know this post is a little old but I had a medical procedure in 2011 and withdrew $12K from my Roth IRA to pay for it. I am now looking at receiving a tax return for about 5K from 2010. I was concerned that this would count as income since I plan to file BK shortly. But, now I am wondering if I can just deposit it back into my Roth IRA as a repayment. Thoughts?

It depends on where you live. As Des wrote, contributions to a Roth IRA are not exempt in Arizona if the contribution is within 120 days of filing.

For Florida, there is caselaw which supports the notion that moving funds into a Roth IRA immediately prior to filing, could be constituted as hindering, delaying or defrauding creditors. This is why I STRONGLY suggest that you work with an attorney on this important matter.

There are many cases from Florida ALL finding that stuffing money into an IRA on the eve of bankruptcy (or while insolvent) is nothing more than fraudulent. I think it was best said in In re Siervo, 2006 WL 3068841, *3 (Bankr. S.D. Fla. April 3, 2006)... that there is a "close line between pre-bankruptcy planning and the intent to hinder, delay or defraud creditors."

Here's some more caselaw for anyone that cares to read it. A recent ruling was from Judge Jenneman from In Re Asunmaa, Bankr. M.D. Fla, 2009, Case 09-bk-07428-KSJ. It was almost on point.

The Florida bar actually has an interesting article on this very matter referencing the case I listed (Asunmaa).

In re Jennings, 332 B.R. 465, 469 (Bankr. M.D. Fla. 2005)
In re Simms, 243 B.R. 156, 159 (Bankr. S.D. Fla. 2000)
In re Sanderson, 382 B.R. 595, 597 (Bankr. M.D. Fla. 2002)
In re Barker, 168 B.R. 773, 775 (Bankr. M.D. Fla. 1994)