How Safe Is Your IRA?

How Safe Is Your IRA?

No, this blog is not about how the custodian holding your IRA investments protects itself against hackers.  Rather it’s about the legal protection your account offers against creditors.  Although most of you probably will never have to deal with irate business creditors, keep in mind that should you end up being among the large minority of citizens that get divorced, your ex-spouse is likely to become your biggest creditor.  So the following may be of interest.

Federal law prohibits creditors from going after money in a retirement plan that was set up under the Employee Retirement Income Security Act (ERISA).  Most (but not all) company-sponsored retirement plans fall under this category, including:

  • 401(k) accounts
  • Pensions
  • Profit sharing plans
  • Group health plans
  • Life & disability insurance plans
  • Health Retirement Accounts (HRA) and Health Savings Accounts (HAS)

These plans enjoy the strongest legal protection for personal assets.  As an example, recall the murder trial of O.J. Simpson.  Although Simpson was ultimately found not guilty, in 1997 the father of Ron Goldman (one of the two victims) won a $33 million wrongful death lawsuit against Simpson.  The Goldman family tried to collect against Simpson’s NFL pension (among other assets) but was denied access to the money.

If you live in California and your retirement account is not qualified or covered by ERISA, then a creditor could potentially seize part or all of it.  Non-ERISA accounts include:

  • IRA, Roth, and SIMPLE IRA accounts
  • SEP and Keogh plans
  • 403(b) accounts
  • State & local government pensions. Exceptions are the California State Teachers’ Retirement System (CalSTRS) and the California Public Employees Retirement System (CalPERS) which are protected from creditors under California law.

What happens to your IRA or Roth when a creditor attempts to “attach” (that’s the legal term) your assets?  Under California law the amount necessary for your (and your family’s) support in retirement can be exempted.  But how to calculate that is ultimately up to the court to decide based on your particular circumstances.

One exception that’s worth knowing about is roll over protection.  If you roll over funds from an ERISA-qualified account such as a 401(k) into an IRA, those funds remain fully protected from creditors, even though the IRA itself (in California) is not.  Just make sure to keep documentation proving which funds originally came from an ERISA-qualified account.

There are two circumstances under which a creditor can attach part of your ERISA-qualified account regardless of all these protections.  The first is when you owe money to the IRS.  They have the ability to attach your accounts via court order.  The second is for a qualified domestic relation order (QRDO) issued as part of spousal or child support resulting from a divorce.

One way to try to block creditors from attaching your non-ERISA-qualified retirement accounts is by filing for bankruptcy.  Bankruptcy laws typically allow you to protect some of your retirement savings as well as your primary home.  But of course there are significant downsides to your financial life after undergoing a bankruptcy.  The best way to protect your savings is to pay all your bills on time and to maintain harmonious relations with your spouse.  If you can do that, it won’t matter where you keep your savings!

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