When I ask the important question: “How safe is your IRA?” I’m not referring to the way your IRA custodian protects your account against hackers.
Rather, this is about the legal protection your IRA account provides against creditors. Federal law prohibits creditors from going after money in a retirement plan 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 and disability insurance plans
• Health Retirement Accounts
• Health Savings Accounts
These plans come with 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, the father of Ron Goldman (one of the two victims) won a $33 million wrongful-death lawsuit against Simpson in 1997. Despite trying to collect against Simpson’s NFL pension (among other assets), the Goldman family was denied access to the money. To this day, Simpson still controls it.
If you live in California and your retirement account is not qualified or covered by ERISA, then a creditor can 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 and local government pensions
Exceptions include the California State Teachers’ Retirement System and the California Public Employees Retirement System, which are both protected from creditors under California law.
What happens to your IRA or Roth account 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 it’s ultimately up to the court to decide how to calculate that based on your particular circumstances. One wonders how differently things might have turned out for Simpson if his assets had been kept in an IRA instead of an ERISA-qualified plan.
Rollover protection
An exception that’s worth knowing about is rollover 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 be sure to keep documentation proving which funds originally came from the ERISA-qualified account.
There are two circumstances under which certain creditors can attach part of your ERISA-qualified account regardless of all these protections. First, the IRS has the ability to attach any of your accounts via court order. Do not mess with them. The second is under a qualified domestic relation order issued as part of spousal or child support resulting from a divorce.
You can also block creditors from attaching your non-ERISA-qualified retirement accounts 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 future financial life after undergoing a bankruptcy. The best way to protect your savings is to pay all your bills on time and maintain harmonious relations with your spouse and your service providers. If you can do that, you are almost guaranteed to enjoy a happy life.
Los Altos resident Artie Green is a Certified Financial Planner and principal at Cognizant Wealth Advisors. For more information, call 209-4062 or email [email protected].
