SEP IRA is a protected asset in NJ

I was asked earlier today whether a SEP IRA is protected against creditor lawsuits. Without doing a lot of in depth research, I have found that the answer is generally yes. The answer is not the same in all states as it is dependent upon state statute.

New Jersey exempts the claims of creditors from qualifying trusts. See N.J.
STAT. ANN. § 25:2-1. Qualifying trusts include trusts created or qualifying under the Internal Revenue Code §§ 401, 408. (i.e. IRAs, SEP IRAs and 401(k) plans)

Additionally, there is a New Jersey bankruptcy case on point. See In re Lamb, where the court held that 25:2-1 exempts IRAs. See In re Lamb, 179 B.R. 419, 427 (Bankr. N.J. 1994).

Since SEPs are a type of IRA, all of the IRA requirements and benefits, other than the contribution limits, apply to SEP-IRA accounts as well.

The protection is limited by The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which does not protect IRAs in excess of $1,000,000.

I also found this interesting site which appears to have a lot of information on the topic: http://www.aicpa.org/pubs/jofa/jan2006/altieri.htm

As always – if a transfer of assets is made prior to a lawsuit, it’s good planning. If you do it afterwards, its FRAUD.