You’ve spent your entire working life saving for retirement. You’ve adopted a conservative investment strategy, and you think your retirement assets are relatively safe. But, are they? Or, could a judgment or commercial creditor come and steal them away?
Whether you are already retired or you are counting the days until you close your office door for one final time, protecting your retirement assets should be one of your top financial priorities. You need the money you saved; and, if you don’t, you want to make sure you can leave it to your family. You know (approximately) how much you have, and you know (approximately) how far it will go. Can you and your family afford to have it all go away?
Unfortunately, for many retirement investors, this is a very real possibility. We’ve seen it happen, and an entire body of case law has developed around situations in which judgment and commercial creditors have sought to attach debtors’ retirement assets. It doesn’t always work. But, sometimes it does. Those who have preserved their assets have usually done so by planning ahead.
Reasons to Be Concerned with Asset Protection
Although federal and state laws provide certain protections for certain types of retirement plans, there are a variety of circumstances in which individuals’ retirement assets can be put at risk. Consider, for example, the following:
1. You Are a Working Professional
As a doctor, lawyer, accountant, financial advisor, or other professional, it is easy to lose sight of (or become numb to) the fact that a single mistake could lead to financial ruin. You have professional liability insurance and you operate through a limited liability entity (maybe); but, there is still a very real possibility that a patient, client, or one of their family members will come after you with a claim for malpractice. If you don’t have enough insurance coverage, if you get sued after you let your claims-made policy expire, or if any of a number of other possible scenarios puts your personal assets at risk, your retirement savings could be exposed.
2. You Own a Business
If you own a business, hopefully you operate it through a limited liability entity that you have properly formed and managed to help shield your personal assets from business debts. Hopefully you set up your entity in a state with favorable liability laws. Hopefully your company gets sued there, and hopefully your company has enough insurance coverage that the plaintiff doesn’t have reason to try to go after you personally. Hopefully.
But, there are many circumstances in which business owners – especially small business owners – can face personal liability for debts arising out of their businesses. As a business owner, you have every reason to consider taking steps to protect your retirement investments.
3. You Own Real Estate
If you own real estate (or if you own a company that owns real estate), the same concerns discussed above apply. If someone gets hurt or killed on your property, you can be sure that an enterprising plaintiff’s lawyer will pursue all possible sources of compensation for his or her client.
4. You Drive a Car (or a Boat, Plane, or Golf Cart)
While most accident claims are resolved through insurance settlements, most at-fault drivers don’t have millions of dollars in retirement assets. If you make a split-second mistake that results in serious, life-changing, or life-threatening injuries, don’t you want to know that your retirement assets are secure?
Of course, these are just examples. But, as they should demonstrate, there are innumerable scenarios in which people from all walks of life can face personal liability – and in which their retirement savings may be put at risk.
Strategies for Protecting Retirement Assets from Creditors
So, you need to protect your retirement assets. What options do you have? The good news is that there are options available:
1. Holding on to Qualified Retirement Plans
The Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code (IRC) provide fairly strong protection for “qualified retirement plans.” These are plans established in the employment context, and managed either by the employer (or its designee) or an employee organization. Under the “anti-alienation” provisions of ERISA and the IRC, participating employees are prohibited from freely transferring their retirement assets, and creditors are prohibited from attaching participants’ retirement assets as well.
Qualified retirement plans include:
- 401(k) plans
- Deferred compensation plans
- Profit sharing plans
Importantly, the protections afforded to qualified retirement plans are not absolute. For example, the IRS can take your retirement savings if you don’t pay your federal taxes, and qualified retirement plans can still be subject to division in a divorce.
2. Setting Up a (Separate) Rollover IRA
In some circumstances, it may make financial sense to move retirement assets out of an employer-sponsored 401(k) and into an individual retirement account (IRA). While IRAs enjoy some protection from creditor claims, the level of protection is not as great as that afforded to qualified retirement plans. If you are going to rollover 401(k) assets into an IRA, consider setting up a new IRA account that exclusively holds the rollover assets. If done properly, segregating your rollover assets can allow them to maintain the protections afforded under ERISA.
3. Filing for Bankruptcy
Despite the popular stigma and the undeniable costs involved, in some cases filing for bankruptcy can be the best asset protection strategy available. Of course, this is generally the case only if it is too late to pursue a more proactive approach.
Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), IRAs and Roth IRAs are entitled to partial protection in federal bankruptcy proceedings. The original cap on protected assets was set at $1 million, but this is adjusted for inflation every three years. The 2014 adjustment increased the cap to $1,245,475. If you are facing a claim that would leave you with less than this amount, filing for bankruptcy may be your best option.
4. Cashing Out and Establishing a Private Annuity (or Using Other Asset Protection Strategies)
While cashing out prior to retirement age can result in a tax penalty (typically 10 percent), investors who are currently in retirement may be able to cash out their retirement plans penalty-free. In either case, weighing the costs of cashing out (if any) against the exposure risk of holding assets in a retirement plan may lead to the conclusion that cashing out is the best option.
One popular approach to asset protection for individuals who need to rely on retirement savings is to establish a private annuity. This involves transferring retirement assets to a family member or trust, on the condition that the recipient will make regular payments (an annuity), similar to retirement account withdrawals. Since you no longer own the assets directly, they will be shielded from your creditors (subject to fraudulent conveyance laws), but you can still collect the funds you need for your retirement.
Other asset protection strategies that involve cashing out of retirement plans or saving for retirement outside of traditional 401(k)s and IRAs include:
- Diversifying your savings into non-retirement accounts
- Saving or investing through a limited liability company (LLC)
- Securing your assets overseas
Discuss Your Asset Protection Strategy in Confidence
If you would like more information about the options available for securing your retirement assets, schedule a call with an asset protection attorney at Jiah Kim & Associates. Call us at (646) 389-5065, or contact us online and we will respond as soon as possible.
This blog post is written for educational and general information purposes only, and does not constitute specific legal advice. You understand that there is no attorney-client relationship between you and the blog publisher. This blog should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.