How can I protect my retirement accounts?

At one time much of America’s net worth was in retirement accounts – particularly ERISA plans. But to answer your question, we plan in context to a client’s state laws because the extent to which their plans are lawsuit-proof depends largely upon state law.

But we can generally discuss the protection for retirement accounts. First, we must divide retirement plans into: 1) ERISA-qualified plans, and 2) non-qualified retirement plans. Non-qualified plans include Individual Retirement Accounts (IRAs), Roth IRAs and SEP IRAs. ERISA-qualified plans are retirement accounts under the Employee Retirement Income Security Act of 1974 (ERISA). ERISA pension or profit sharing plans are spendthrift trusts. Their beneficiary cannot gift, anticipate or encumber the plan’s principal or income. This spendthrift provision immunizes the plan from creditor claims. Qualified retirement plans include profit sharing plans (defined contribution plans), pension plans (defined benefit plans) and 401K and 403B plans (plans where the employee makes voluntary contributions). But not every ERISA pension plan is lawsuit-proof. To be protected, the company owners and at least one non-related employee must be covered under the plan. Technical deficiencies and non-compliance issues may also disqualify 401K and similar plans from ERISA protection. That’s why it’s important to have your asset protection lawyer or plan administrator review your pension plan. You can’t assume that it is protected.

IRAs, Roths and SEP-IRAs are not ERISA protected. Their protection against creditors depends upon state law. As with the state homestead, insurance, wage, and other exemptions, the state laws vary. Some states fully protect non-qualified retirement accounts, but most states partially protect non-qualified plans, usually for a statutory amount (i.e., $50,000), or for such amounts the court considers necessary to support the debtor’s retirement. Other limitations or restrictions may apply under your state statutes. Several states protect accounts held in trust, but not distributions made to the beneficiary. So whether your retirement plan is lawsuit-proof depends upon: 1) whether your plan is qualified under the Employee Retirement Income Security Act (ERISA); 2) whether your state law exempts non-ERISA plans (i.e. IRAs), and for how much; 3) whether your plan is a pension or welfare benefit plan; 4) whether it’s in payment mode or still in trust; 5) what creditor is claiming the retirement account; and 6) whether you are in bankruptcy. Fortunately, if your state doesn’t adequately protect non-ERISA retirement accounts, you have other lawsuit-proofing options.