Guest article by Rae Steinbach
When saving money for retirement in a 401(k), IRA, or similar account, most people assume those tax-deferred funds will always be safe and available. Unfortunately, this isn’t universally the case.
Several states fail to protect the money in certain accounts, such as IRAs, from being collected if the account holder were to be sued. A lawsuit from a creditor could wipe out your retirement savings if you’re not careful.
That’s why it’s important to familiarize yourself with the applicable state and federal laws. You don’t want to save for years, only to find out that your money can be taken away if you lose a court case or settle a lawsuit.
If a creditor sues for an unpaid debt, typically, federal law allows your retirement funds to remain untouched if you file for bankruptcy. That is, if those funds are kept in the appropriate account. In 2014, the Supreme Court decided that an inherited IRA isn’t protected when the party inheriting the account files for bankruptcy, unless the IRA was inherited from a spouse.
If you owe money to the IRS, your IRA savings will not be protected if the government sues for what you owe. The IRS treats retirement assets like any other seizable assets.
Again, different states have different laws regarding the degree to which retirement savings can be sheltered. In some states, like Texas and Washington, nearly all funds kept in an IRA are safe.
California law allows you to shelter enough funds to prevent your or your dependents from falling into poverty, but the limit may not be enough to maintain your lifestyle or leave retirement savings to family members after you pass on.
Unfortunately, in some others states, like New Mexico and New Hampshire, no laws exist protecting IRA savings.
Sheltering Your Retirement Savings
There are several steps you can take to protect your funds and assets. Again, your first step should be to learn how your state’s laws could affect your savings. If your circumstances permit it, you may want to retire in a state that offers more thorough and robust protections than the state in which you currently reside. If you find yourself embroiled in a lawsuit, the next step would be to seek out a law firm with lawyers that have experience in defending cases around retirement savings.
You could also consider saving for retirement in safer accounts. With a 401(k), but you’re much more likely to keep what you do save in that type of account.
If you own a business or work in a profession with a high risk of lawsuits, investigate your insurance options. Having the right insurance could be a worthy investment if you ever are sued. For your personal needs, an umbrella insurance policy is also useful.
Because the laws regarding sheltering retirement savings often change, it’s important to be proactive, not only when you approach retirement age, but throughout your career. Taking the right steps now will pay off in the future.