Not All Retirement Plans Are Protected From Lawsuits
Not All Retirement Plans Are Protected From Lawsuits
Retirement plans fall under two main categories: Those protected by federal laws under ERISA and those protected under state laws. Care must be used in choosing which type of government sanctioned retirement plan is best for you.
ERISA plans are governed under federal law and fall under the auspices of both the IRS and the Department of Labor. They include 401K, SEP, Simple IRA, Profit Sharing, Stock Bonus, and ESOP (Employer Stock Option) plans. Non-ERISA plans are anything else and include the different types of IRAs. They have similar rules so far as the IRS is concerned, but ERISA plans usually allow higher contribution limits. Both types of plans are known as "qualified plans".
From an asset protection viewpoint, both ERISA and non-ERISA plans offer protection from creditors and lawsuit judgments, but they vary as far how much money is protected. ERISA plans are completely protected from creditors with no upper limit. IRAs on the other hand are protected from creditors only up to $1/2 million.
In bankruptcy filed under federal and most state laws ERISA accounts are protected up to $1 million although in some state jurisdictions the protection is only up to $1/2 million. In fact, in Nevada courts, bankruptcy protection for ERISA plans is limited to only $1/2 million.
Now what about IRAs? Funds in IAS's are always governed by state law. In Nevada, IRA accounts are also only protected up to $1/2 million from creditors and bankruptcy.
In other words, if you are threatened by creditors and you have over $1/2 million in your IRA, you will potentially lose all of it over $1/2 million in a lawsuit judgment or bankruptcy. What can you do?
It is common advice that when you leave an employment with money vested in a 401K that you should roll that money over into an IRA, either traditional type or Roth type. Remember that if you roll it over into a Roth IRA, you will have to pay income taxes on the whole amount in the process. This may be wise if you will have higher tax rates in the future. But in either case, your money will now be more exposed to losses to banks, plaintiffs, and bankruptcy. Hence, you should think twice about rolling money from the ERISA type plan into a personal IRA.
Now, if your money is in an IRA (protected only up to $1/2 million) and you perceive that your assets are threatened, then you should consider rolling the IRA into an ERISA covered plan. For example, you could create your own profit sharing plan in an existing or new LLC. Likewise you may be able to roll it over into a 401K plan to protect it.
As an aside, think about the advisability of using a qualified plan in the first place as a means of accumulating wealth for retirement. They have good asset protection features, but they may become a major target for taxation in the future.
Many believe that tax rates will rise in the future and that IRA and 401K assets will be a major target for income taxes. With that in mind, there is a strong movement on foot to only use these plans up to employer matching levels and put the rest of your savings in accounts where they receive an even more tax favored status. Taxes are indeed a major asset invader. A tax free environment is everyone's dream. Did you know that permanent cash value life insurance fits this description?
Another great concept: Tax free growth and asset protection in one! This is one of our favorite topics of discussion and deserves some time in consultation with your advisor.
Steven Fales, MD is a financial advisor with Fales and Fales Financial, LLC.
Get The Most Out Of Your Annuity Rates For A Happy Retirement Plan Use Your Pension Plan to Secure the Best Annuity Rates for Your Retirement Taking the Proper Precautions when Choosing a Lawyer DePuy Hip Recall Lawyers – Taking The Direct Action Getting The Appropriate Compensation With The Help Of Hip Recall Lawyers A Simple Guide That Will Make It Easy To Hire The Right DUI Lawyer For The Help You Need Are You Looking For Accident Lawyers? When Do You Need Personal Injury Lawyers? Choosing a Good Divorce Lawyer How to Choose Social Security Disability Lawyers Is It Time To Call Divorce Lawyer Liverpool? Are you looking for a Zadroga lawyer? Want Retirement Answers? Seek Expert Solutions