Tip of the Month | March 2023
Creditor Protection of Retirement Accounts
Written By: Kevin Reardon, CFP®
401k and IRA accounts offer various levels of protection when investors run into financial and legal trouble.
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 provided federal protection to IRA holders who run into financial trouble. IRA accounts, including Roth and Simple IRAs, are protected under bankruptcy proceedings up to $1,512,359, which is adjusted annually for inflation.
401k & Profit-Sharing Accounts:
The Employee Retirement Income Security Act (ERISA) governs 401k retirement accounts and offers broader protection than for IRA accounts. 401k accounts are protected not only from bankruptcy, but also from other creditors and civil lawsuits.
The two exceptions where both IRA and 401k assets are subject to claims:
1) If you owe money to the IRS.
2) Through divorce proceedings if a state court issues a qualified domestic relations order (QDRO), transferring some of your assets to your former spouse.
When you combine the creditor protections of retirement accounts with an appropriate amount of umbrella insurance coverage, most investors can greatly minimize the risk of losing assets to creditors.