AUGUSTA — Maine is one of only a few states that lets creditors attempt to access cash locked up in a debtor’s Individual Retirement Account, a privilege that risks the life savings of people thrifty enough to save for their old age.
Worried that it may help drive retirees away from the state, legislators are eyeing the possibility of changing the law to offer greater protection to IRA money.
The state lawmaker pushing hardest for the change is Rep. Paul Chace, R-Durham, who said this week that supporters are looking “to create fairness and protection” for IRA holders that would be identical to protections provided for other federally created retirement programs.
Chace called it “stunning to find out that there is not equal protection” among the various retirement savings plans promoted by the federal government.
Lincoln Merrill, the president of Patriot Insurance Co. in Yarmouth, told legislators recently that “Maine struggles to keep our residents here when they retire. Exposing their retirement assets to (lawsuits) when other states do not is another reason to move away.”
In a curious legal glitch, the state protects assets in 401(k) plans from seizure from creditors, but the state allows creditors to go after the money in a person’s IRA, except for $15,000 of it. The state’s policy is to exempt IRAs from creditors only to the extent considered reasonably necessary for the support of the debtor and any dependents.
A bill before the Judiciary Committee, though, would change the law to offer savers more protection. Officials are working to finesse the wording.
Chace said creditors “want to be sure that they are treated with fairness in their credit collection” as well, so it’s possible Maine might follow the lead of some other states in exempting only the first $500,000 or $1 million in IRA investments from seizure. He said he’s hoping for a compromise along those lines.
Though people can fall into debt in many ways, the most common by far is racking up medical bills that aren’t covered by health insurance, tabs that can easily gobble up the savings of even well-off residents.
“My emphasis is that many Maine residents are either self-employed or business owners,” Chace said, and shouldn’t be putting their retirement funds at risk.
“When we are looking at ways to be competitive and attractive for folks to prepare for retirement, subjecting these small businesses to the liability of losing their retirement protections” afforded to those who have 401(k)s is neither fair nor attractive, Chace told the committee.
Jennifer Breton, a partner with the Falmouth financial firm of Lebel & Harriman, said that IRA investors “are owed the same protections” available to those relying on 401(k)s and 403(b)s.
The law does offer protection for IRA assets during a bankruptcy. Nearly $1.3 million in IRA funds are off limits to creditors under current federal law.
But there are many debt collection proceedings outside of bankruptcy that are covered only by state law.
States other than Maine that fail to offer all retirement funds at least roughly the same protection from creditors include California, Nebraska and Wyoming.
“This is an important consideration from many aspects,” Breton said. “At a minimum, it may be a significant factor for determining residency in retirement.
“Maine already has heavy income and estate tax burdens that encourage and result in mass relocation to tax-friendly states,” she pointed out.
Rep. Paul Chace
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