Roth IRA Conversions as an Asset Protection Strategy: Does it Always Work?

Before 2010, you could only switch from a traditional IRA to a Roth IRA if your income was $100,000 or less. But now, anyone can do it, no matter how much they make. With a traditional IRA, you put in money that hasn’t been taxed yet, and it grows without getting taxed. But when you take the money out, you have to pay taxes on it. With a Roth IRA, you put in money after it’s been taxed, and it grows without getting taxed. When you take the money out, you don’t have to pay taxes on it. Also, with a Roth IRA, you don’t have to start taking out a certain amount of money when you turn 70½, like you do with a traditional IRA. That means your money can keep growing without being taken out, which can help protect it from creditors. So, if you’re worried about owing money to someone when you’re older, it might be a good idea to switch to a Roth IRA. In Florida, retirement accounts like traditional IRAs and Roth IRAs are usually protected from creditors. But if someone tries to protect their money by transferring it into an exempt account (like a Roth IRA) from a non-exempt account (like a traditional IRA), it could be considered fraud. This means that the money in the exempt account could still be taken by creditors if the conversion was done to avoid paying them. Under Florida law, there is a distinction between a fraudulent transfer and a fraudulent conversion. A fraudulent transfer occurs when a debtor transfers exempt property to someone else without getting something of equal value in return and with the intent to defraud creditors. On the other hand, a fraudulent conversion occurs when a debtor changes nonexempt property into exempt property with the intent to defraud creditors.

The Florida law defines a “conversion” as any way of changing or getting rid of an asset so that the products or proceeds of the asset become exempt from creditors and still belong to the debtor. This means that the conversion from a traditional IRA to a Roth IRA, where part of the traditional IRA becomes exempt, could be considered a conversion under Florida’s fraudulent conversion law. If someone in Florida is sued and they convert their regular retirement account to a special kind of retirement account to protect their money, it might be considered fraud. But the person suing them has to prove that the conversion was done on purpose to avoid paying them. Even if it looks like fraud, the person who did the conversion can argue that they did it for other reasons, like saving money on taxes. If someone does a fraudulent conversion of assets, a creditor has up to four years to take legal action. The creditor can seek remedies like reversing the fraudulent conversion, getting a court order to stop further conversions, or getting other types of relief. If the creditor wins a court case against the debtor, they can take the converted assets or the money made from them. When converting to a Roth IRA, the taxpayer has to pay taxes on the converted amount. To get the most benefit, it’s best to pay the taxes using non-IRA money. If the taxes are paid with IRA money, less money is converted to the Roth IRA. In Florida, converting a traditional IRA to a Roth IRA can provide better protection against creditors. This is because creditors generally cannot access funds in a Roth IRA. Converting to a Roth IRA also means you won’t have to take required minimum distributions, which can also be protected from creditors. While creditors could potentially challenge the conversion, it would be difficult for them to prove that you intended to defraud them. Overall, converting to a Roth IRA can provide better asset protection in Florida. 1. Look at section 512 of the Tax Increase Prevention and Reconciliation Act of 2005, Public Law number 109-222.
2. Section 408(b) of the Internal Revenue Code.
3. Section 408(d) of the Internal Revenue Code.
4. Section 522(b) of Title 11 of the United States Code from 1978.

In simpler terms: Check out these specific sections of the tax laws for important information. Florida law allows individuals to exempt certain property from creditors, including social security and veterans’ benefits. Traditional and Roth IRAs may also be exempt if they meet certain federal tax requirements. However, some states only exempt traditional IRAs, not Roth IRAs, and a few states provide limited protection for Required Minimum Distributions (RMDs) from IRAs. It’s important to consider these rules when planning for retirement and protecting your assets from creditors. If you transfer money from one IRA to another IRA, it’s not considered a fraudulent transfer. In Florida, there are laws that deal with fraudulent transfers and conversions, and they can affect the protection of your retirement funds from creditors. It’s important to understand these laws and how they could impact your financial situation. David Pratt and Lindsay A. Roshkind are attorneys in a personal planning department at a law firm in Boca Raton, Florida. They specialize in taxation, wills, trusts, and estates.

Source: https://www.floridabar.org/the-florida-bar-journal/roth-ira-conversions-as-an-asset-protection-strategy-does-it-always-work/