How to Protect Retirement Plan Assets From Creditors

This question can be evaluated from two main points of views:

First, are my retirement assets protected from the employer’s creditors?
And secondly, are my retirement assets protected from personal creditors?

Employer’s Creditors

Most of the vested retirement plans such as 401(k) and 403(b) are usually protected from creditors in case the company one works for goes bankrupt. Qualified plans are not owned by the employer but they are the properties of the employee. The same holds true for qualified traditional pension plans.

However, there are certain non-qualified and non-vested retirement plans and funds that can be accessed by a company’s creditors in case the business goes bankrupt.

Non-qualified plans are usually referred to as rabbi trust, executive compensation, supplemental retirement savings, deferred compensation among other names. The main point here is that these plans are “non-qualified”. In effect, this means that they are not protected by the Employee Retirement Income Security Act (ERISA).

One needs to be aware of such plans if he or she is a participant as they can be accessed by creditors. You should always check with the relevant dept in your company (probably HR) to make sure that their retirement plans are qualified and as such catered for by ERISA.

IRAs, which are individual accounts, are not assets of the employer. However, if one is self-employed and not incorporated, depending on the state he or she resides, some IRA assets can be at risk when the business files for bankruptcy.

Personal Creditor’s

The general directive of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) is that both Roth and traditional IRAs are protected up to an amount of $1 million. This directive only holds ground in bankruptcy judgments and doesn’t apply in other judgments.

For example, individual accounts are not protected in divorce cases, a criminal judgment case, or an IRS alien case. At the same time, the level of protection across different states widely varies. For more information on the protection within different states follow this link.

In 2007, there was a case in the state of Kansas where an inherited IRA account was availed to the descendant’s creditors, yet it had a revocable trust as the beneficiary. To avoid such situations, one can name an irrevocable trust to be the beneficiary and spendthrift, and discretionary clauses in the trust will act as protection. Naming an individual(s) as the beneficiary(s) of the account can also be used to avoid such a problem.

Many other problems associated with an inherited IRA arise from the fact that most states fail to recognize an inherited IRA as a retirement plan since the owner receives income from the account.

Conclusion

It is evident that IRA has less protection when compared to an employer’s plan. However, if you have left your employer, it is not advisable to leave the fund in the employer’s account. An IRA account is much better. The main reasons why it’s better are: flexibility, has easier access, and its overall costs are not that high. At the same time, there is ERISA protection for rolled-over funds.

If you found this post informative, please feel free to share it with others on different social media platforms. Let’s help others make better and informed decisions regarding the safety of their retirement plan assets.

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