How To Protect Your Retirement Accounts From Predators

Monday, December 19, 2011, AM | Leave Comment

Oops! I meant to say creditors. Sorry for the slip up. You have earned a respectable income all your life. Now you are retired or out of work. In this lousy market, the value of investment in your retirement account is down and perhaps way down. What happens to your company-sponsored retirement accounts that you have so feverishly taken part in? You need to protect them from creditors, a category that can include former spouses or people who have won lawsuits against you.

To protect your assets under these circumstances ought to be your utmost priority. There are three major aspects to protecting your assets:

  • The type of account you have,
  • Where you live, and
  • Whether you inherited the assets or amassed the funds yourself.

Don’t lose your sleep over it. Most employer-sponsored plans, including 401(k), are covered by the Employee Retirement Income Security Act, known as ERISA, and are completely protected from creditors – except when those creditors are former spouses or the IRS. You need to be on good terms with either predator.

The retirement accounts that are not company-sponsored such as IRA are not covered by ERISA. However, in case you have filed for bankruptcy, federal law protects

  • Up to $1 million in an IRA account that you contributed to directly.
  • The entire account balance if the money was rolled over into IRA from a company plan.

Make sure to keep careful records tracing the funds. For anything short of bankruptcy, each state law determines whether IRA (including Roth IRA) are shielded from creditors’ claims. So check with your state.

In a Nutshell
If you have been laid off or are retiring, rolling over assets from a qualified plan, such as 401(k), into an IRA will give some benefits if and when you do estate-planning. However, if you live in a state where IRA accounts are not protected from creditors, you would be better off leaving the assets in the company plan.

If you are leaving a company that has a cash-balance pension plan, you should resist the temptation to withdraw the money in a lump sum, unless you need the money to live on. Upon withdrawal, the money would be exposed to creditors’ claims, and you would have to pay income tax on the full amount.

Be aware that state and federal laws against fraudulent conveyance prohibit transfers intended to hinder, delay or defraud creditors.

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