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Florida Bar Journal

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


Prior to 2010, a traditional individual retirement account could be converted to a Roth IRA only when the account holder’s modified adjusted gross income was $100,000 or less. Beginning in 2010, all taxpayers, regardless of their income levels, are eligible to take advantage of the opportunity to convert their IRAs to one or more Roth IRAs.1 T ypically, taxpayers consider Roth IRAs solely as a means of generating long-term income tax savings; however, a Roth conversion may have consequences (sometimes good and sometimes bad) from an asset protection perspective.

Comparing Traditional IRAs and Roth IRAs
With a traditional IRA, a taxpayer typically makes contributions with “pre-tax” dollars, and the investment is allowed to grow on a tax-deferred basis; that is, amounts earned, including the appreciation and income earned within the IRA, are not taxed until distributions are made to the IRA owner or beneficiary.2 A dditionally, traditional IRAs are subject to mandatory distribution requirements when the taxpayer attains age 70½.3 Such mandatory distributions are generally referred to as “required minimum distributions,” or RMDs. These forced distributions result in income tax to the taxpayer each year after attaining age 70½, while continuously diminishing the tax-deferred amount remaining in the account (subject to offsetting growth and income in the account).

Conversely, contributions to Roth IRAs and “converted” Roth IRAs are considered made with “after-tax” dollars and, consequently, the appreciation and income inside a Roth IRA grows tax-free. Therefore, there is no income tax when the taxpayer withdraws money from the Roth account in retirement or when distributions are made to his or her beneficiaries.

Furthermore, Roth IRAs are not subject to RMDs when the taxpayer attains age 70½. Consequently, distributions from a Roth IRA to the account owner do not have to be made. More importantly, from an asset protection perspective, because Roth IRAs do not have RMDs with respect to the account owner, creditors of the owner generally cannot assert a claim against amounts in a Roth IRA unless the taxpayer makes a voluntary withdrawal from the account. Thus, it may make sense for an individual with potential creditors who is approaching or has attained the age of 70 ½ to convert his or her IRA to protect any RMDs.

Asset Protection

Exemptions Under State Law — In Florida, whether a retirement account (traditional IRA or Roth IRA) is exempt from creditors depends on Florida law. F.S. §222.20 provides that pursuant to §522(b) of the Bankruptcy Code of 1978,4 & #x201c;residents of this state shall not be entitled to the federal exemptions provided in s. 522(d) of the Bankruptcy Code.”5 C onsequently, the relevant exemption provision is F.S. §222.21(2)(a), which generally provides that both traditional IRAs and Roth IRAs are exempt from the creditor claims of an owner of such an IRA.6 H owever, amounts distributed as RMDs from a traditional IRA are not necessarily considered to be exempt property under F.S. §222.21(2)(a) and, thus, may not be protected from claims of the distributee’s creditors. Query whether a fraudulent conversion or transfer occurs by converting into exempt property ( i.e., the Roth IRA) property which would otherwise be distributed as nonexempt property ( i.e., the RMDs). Consequently, Florida’s fraudulent conversion and transfer laws must be considered.7

Fraudulent Conversion and Transfer Laws — Under Florida law, a conversion by a debtor of a nonexempt asset to an exempt asset is a fraudulent conversion as to a creditor, which may be set aside by such creditor “whether the creditor’s claim to the asset arose before or after the conversion of the asset, if the debtor made the conversion with the intent to hinder, delay, or defraud the creditor.”8 The relevant queries are as follows: 1) Does the conversion to a Roth IRA constitute a “conversion” to which Florida’s fraudulent conversion law applies, and 2) with regard to creditors’ claims arising before and after the Roth IRA conversion, did the debtor engage in the conversion with the actual intent to hinder, delay, or defraud such creditors? As discussed below, it seems unlikely under Florida law that a Roth IRA conversion would be deemed a fraudulent conversion of the RMDs, which would have otherwise been distributed from a traditional IRA; however, if it is, the fraudulent conversion rules could operate to expose all or part of the Roth IRA assets to the account holder’s creditors.

Before discussing whether the conversion to a Roth IRA constitutes a “conversion” under Florida law, it is first important to understand the distinction in Florida between a fraudulent transfer and a fraudulent conversion. A fraudulent transfer occurs if the debtor transfers exempt property to a transferee without receiving a reasonably equivalent value in exchange for the transfer and with the actual intent to hinder, delay, or defraud any creditor of the debtor, whether the creditor’s claim arose before or after the transfer.9 On the other hand, a fraudulent conversion occurs, regardless of whether there is a transfer, if the debtor converts nonexempt property to exempt property with the actual intent to hinder, delay, or defraud any creditor of the debtor, whether the creditor’s claim to the property arose before or after the conversion of the property.10

Conversion — F.S. §222.30(1) defines a “conversion” as “every mode, direct or indirect, absolute or conditional, of changing or disposing of an asset, such that the products or proceeds of the asset become immune or exempt by law from claims of creditors of the debtor and the products or proceeds of the asset remain property of the debtor.” This statute defines a fraudulent conversion broadly, making every conversion of nonexempt to exempt assets a conversion within the definition of the statute.11 C onsequently, it appears that the conversion from a traditional IRA to a Roth IRA, whereby part of the traditional IRA that may have been previously nonexempt ( i.e., the RMDs) becomes exempt, could fall within the definition of a conversion for purposes of applying Florida’s fraudulent conversion law.

Actual Intent — The conversion of nonexempt assets into exempt assets, however, is not fraudulent per se.12 The conversion is fraudulent only if it is done with the actual intent to hinder, delay, or defraud the interests of creditors.13 U nder Florida law, “[t]he party objecting to the exemption must prove by a preponderance of the evidence that the debtor harbored the requisite intent. . . , which may be inferred from extrinsic evidence.”14

In determining actual intent, Florida courts consider “badges of fraud,” among other factors.15 Such badges of fraud include the following:

[W]hether: (1) The transfer or obligation was to an insider; (2) [t]he debtor retained possession or control of the property transferred after the transfer; (3) [t]he transfer or obligation was disclosed or concealed; (4) [b]efore the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit; (5) [t]he transfer was of substantially all the debtor’s assets; (6) [t]he debtor absconded; (7) [t]he debtor removed or concealed assets; (8) [t]he value of the consideration received by the debtor was reasonably equivalent to the value of the assets transferred or the amount of the obligation incurred; (9) [t]he debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred; (10) [t]he transfer occurred shortly before or shortly after a substantial debt was incurred; and (11) [t]he debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor.16

This is a nonexclusive list of factors that a court should consider in determining a debtor’s actual intent. As such, a finding that a conversion was a fraudulent conversion is a very fact-specific inquiry.

Consequently, although a Roth IRA conversion may convert assets from nonexempt to exempt, creditors bear the burden of proving facts indicating that the debtor converted his or her traditional IRA to a Roth IRA with the actual intent to hinder, delay, or defraud such creditor. Further, even if a creditor is able to prove some of the above badges of fraud existed at the time of the conversion to a Roth IRA ( i.e., (2), (4), and (10) above), the taxpayer has an argument that the actual intent of the taxpayer was to take advantage of the economic and tax planning benefits of the conversion rather than to hinder, delay, or defraud his or her creditors.

Remedies — A fraudulent conversion cause of action must be brought within four years after the fraudulent asset conversion was made; otherwise, the cause of action is extinguished.17 If a court finds that an individual’s Roth IRA conversion was, in fact, a fraudulent conversion, the creditor may seek the following remedies:

(1) Avoidance of the fraudulent asset conversion to the extent necessary to satisfy the creditor’s claim;

(2) An attachment or other provisional remedy against the asset converted in accordance with applicable law; or

(3) Subject to applicable principles of equity and in accordance with applicable rules of civil procedure,

a. An injunction against further conversion by the debtor of the asset or of other property;

b. Any other relief the circumstances may require.18

Further, “[i]f a creditor has obtained a judgment on a claim against the debtor, the creditor, if the court so orders, may levy execution on the asset converted or its proceeds.”19 C onsequently, if an action is brought within the specified limitations period and the court finds that a debtor has engaged in a fraudulent conversion, the conversion is voidable as to a creditor.

Payment of Taxes on Conversion

Economic Benefit — Upon converting to a Roth IRA, the taxpayer must include the conversion amount in his or her gross income in the year of conversion.20 If the conversion takes place in 2010, however, unless the taxpayer elects otherwise, one-half of the conversion amount is includible in the taxpayer’s gross income in each of 2011 and 2012.21

To achieve the greatest economic benefit of converting to a Roth IRA, the tax incurred upon conversion should be paid from non-IRA, nonexempt assets of the taxpayer. Consider the following example: Taxpayer has $100,000 in a traditional IRA and converts to a Roth IRA. Assuming a 35 percent tax rate, the tax incurred on the conversion is $35,000. If the taxpayer pays the $35,000 tax with IRA assets, only $65,000 is converted to a Roth IRA. Conversely, if the taxpayer pays the $35,000 tax with non-IRA, nonexempt assets, $100,000 is converted to a Roth IRA.

From an economic perspective, the taxpayer is in a better economic position using the second option because the $100,000 (as opposed to $65,000) will continue to grow income tax-free in the Roth IRA. Additionally, from an asset protection perspective, the second option provides the most asset protection because the $100,000 now in the Roth IRA is exempt from creditors’ claims and the $35,000 non-IRA, nonexempt asset used to pay the tax is no longer available to satisfy creditors’ claims.

Payment of Tax as a Fraudulent Transfer — A concern with the above strategy is that the payment of the tax from non-IRA, nonexempt assets may itself constitute a fraudulent transfer of nonexempt assets.22 H owever, if the underlying conversion of the IRA to a Roth IRA is not a fraudulent conversion, the use of nonexempt assets to pay the tax incurred upon the lawful conversion should not constitute a fraudulent transfer. Furthermore, it is hard to imagine that a creditor would be able to argue successfully that the payment of taxes to the IRS could be construed as a fraudulent transfer. Therefore, the payment of tax with nonexempt assets removes additional assets from a creditor’s grasp.


In Florida, creditors of a Roth IRA owner, generally, cannot assert claims against amounts in a Roth IRA. Because a Roth IRA owner is not required to take RMDs (as with a traditional IRA), the conversion from a traditional IRA to a Roth IRA should exempt, from creditor claims, property which may have otherwise been nonexempt ( i.e., the RMDs). Although such a conversion may be subject to attack by creditors under Florida’s fraudulent conversion laws, such an attack would face challenges because a fraudulent conversion claim requires not only a conversion, but also that the creditor prove the Roth IRA owner’s actual intent to hinder, delay, or defraud such creditor of a claim. As the actual intent of many traditional IRA owners who convert to a Roth IRA is to take advantage of the economic and tax planning benefits of the conversion, it may be difficult for creditors to prove the requisite actual intent necessary for a successful fraudulent conversion claim. Consequently, Roth IRA conversions have the potential to provide traditional IRA owners with additional asset protection, if the circumstances surrounding the conversion do not implicate the “badges of fraud” tending to prove an owner’s actual intent to hinder, delay, or defraud creditors.

1 See §512 of the Tax Increase Prevention and Reconciliation Act of 2005, Pub. L. No. 109-222.

2 I. R.C. §408(b).

3 I. R.C. §408(d).

4 1 1 U.S.C. §522(b) (1978).

5 Note, however, that
Fla. Stat. §222.201 expressly allows individual debtors to exempt, in addition to any other exemptions allowed under Florida law, any property listed in §522(d)(10) of the Bankruptcy Code of 1978. Section 522(d)(10) of the Bankruptcy Code, 11 U.S.C. §522(d)(10) (1978), provides an exemption for the following: “The debtor’s right to receive — (A) a social security benefit, unemployment compensation, or a local public assistance benefit; (B) a veterans’ benefit; (C) a disability, illness, or unemployment benefit; (D) alimony, support, or separate maintenance, to the extent reasonably necessary for the support of the debtor and any dependent of the debtor; (E) a payment under a stock bonus, pension, profitsharing, annuity, or similar plan or contract on account of illness, disability, death, age, or length of service, to the extent reasonably necessary for the support of the debtor and any dependent of the debtor, unless — (i) such plan or contract was established by or under the auspices of an insider that employed the debtor at the time the debtor’s rights under such plan or contract arose; (ii) such payment is on account of age or length of service; and (iii) such plan or contract does not qualify under section 401(a), 403(a), 403(b), or 408 of the Internal Revenue Code of 1986.”

6 Note that under Florida law, traditional IRAs and Roth IRAs are exempt from creditor’s claims only if such accounts qualify as being tax exempt under I.R.C. §§408 and 408A, respectively. Consequently, to ensure protection from creditors, it is important to ensure that the account (whether traditional or Roth) satisfies the necessary federal tax requirements for tax exemption. Additionally, note that some states provide that traditional IRAs are exempt from creditors, but Roth IRAs are not exempt. See, e.g., Ga. Code §44-13-100(a)(2.1) and W. Va. Code. §§38-10-4(j)(5). Taxpayers in those states, particularly those with potential creditor issues, may not want to convert to a Roth IRA (despite the income tax benefits of the conversion), because a Roth conversion may subject the IRA assets to the claims of the account holder’s creditors. A few states grant limited protection for RMDs such that RMDs are exempt from creditors to the extent they are reasonably necessary for the support of the account holder and any of his or her dependents. See, e.g., Ga. Code §44-13-100(a)(2)(F) and W. Va. Code §38-10-4(j)(5). In these states, a Roth conversion may be desirable from an asset protection perspective, but only if the account holder expects that all or a portion of his or her RMDs will not be reasonably necessary for the support of the account holder and his or her dependents.

7 Note that if the conversion was simply from one IRA to another IRA ( i.e., from accounts with the same level of exemption), the conversion would not be void as a fraudulent transfer/conversion. See generally In re Kimmel, 131 B.R. 223, 229 (Bankr. S.D. Fla. 1991). Similarly, a state’s fraudulent transfer/conversion laws would not likely be applicable to a conversion from a traditional IRA to a Roth IRA where the RMDs from the traditional IRA would have already been exempt under state law. See endnote six discussing those states in which limited protection is provided for RMDs. In such states, the conversion to the Roth should not have the effect of exempting any additional property from the account holder’s creditors.

8 F la. Stat. §222.30(2).

9 F la. Stat. §§726.102(12) and 726.105(1).

10 F la. Stat. §222.30(2).

11 See In re John A. Asunmaa, 2010 Bankr. LEXIS 901, 6 (Bankr. M.D. Fla. 2010).

12 See In re Simms, 243 B.R. 156 (Bankr. S.D. Fla. 2000).

13 See id. ; see also Fla. Stat. §222.30(2).

14 See In re John A. Asunmaa, 2010 Bankr. LEXIS 901 (Bankr. M.D. Fla. 2010) (citing In re Simms, 243 B.R. 156, 159 (Bankr. S.D. Fla. 2000)).

15 See id.

16 F la. Stat. §726.105(2). Note that
Fla. Stat. §222.30(1) provides that the “definitions of chapter 726 apply to this section unless the application of a definition would be unreasonable.” See also In re John A. Asunmaa, 2010 Bankr. LEXIS 901, 6 (Bankr. M.D. Fla. 2010) (applying the badges of fraud provided in Florida’s fraudulent transfer statute,
Fla. Stat. §726.105(2), to an analysis of actual intent under Florida’s fraudulent conversion statute,
Fla. Stat. §222.30)).

17 F la. Stat. §222.30(5).

18 F la. Stat. §222.30(3).

19 F la. Stat. §222.30(4).

20 See I.R.C. §408A(d)(3)(A)(i).

21 See I.R.C. §408A(d)(3)(A)(iii).

22 Note that the terminology used in this context is a “fraudulent transfer” rather than a “fraudulent conversion” because the debtor is conveying property to a transferee ( i.e., the federal government) rather than converting the property from nonexempt to exempt property. See discussion under the heading “Fraudulent Conversion and Transfer Laws.” Fraudulent transfers are subject to the Florida Uniform Fraudulent Transfer Act found in Ch. 726 of the Florida Statutes.

David Pratt is a partner in Proskauer’s personal planning department and is the managing partner of Proskauer’s Boca Raton office. He is a fellow of the American College of Trust and Estate Counsel and American College of Tax Counsel, is Florida board certified in taxation and wills, trusts, and estates, and has served on The Florida Bar’s Real Property, Probate and Trust Law Section’s Wills, Trusts and Estates Certification Committee. Mr. Pratt is also a past chair of The Florida Bar’s Tax Section and an adjunct professor at The University of Florida’s Levin College of Law, where he teaches a class on advanced estate tax planning in the LL.M. program.

Lindsay A. Roshkind is a member of Proskauer’s personal planning department and practices in Proskauer’s Boca Raton office. She is a graduate of The University of Florida Levin College of Law and has a master of laws in taxation, also from The University of Florida.

This column is submitted on behalf of the Tax Section, Guy E. Whitesman, chair, and Michael D. Miller and Benjamin Jablow, editors.