401k's and IRA's and lawsuits?

[summer2007]

I have heard or read many times that if you got sued for something like a car accident for example that your funds in your 401k or IRA cannot be touched.

I couldn't find out one way or the other if this is fact or fiction.

Just wondering if anyone knew for SURE if this is true or not?

I live in Pennsylvania if it differs state by state.

Jim

[Webzter]

Large IRA's not fully protected from bankruptcy or lawsuit seizure?

Under federal ERISA law, assets held in most employer-based retirement plans such as 401(k)s, pension plans, 403(b)s, and profit-sharing plans have generally been beyond the reach of creditors. But IRAs were not protected on the federal level. Some states protected IRAs, but many provided no or only limited protection.
....

Then, in the time span of a little over two weeks this April, all that changed. First, the U.S. Supreme Court unanimously ruled that assets held in IRAs, both traditional and Roth, generally are protected from creditors. The case concerned a couple who had rolled their $55,000 in company pension and 401(k) assets into an IRA, only later to have creditors try to seize the IRA after they filed for bankruptcy protection due to hard times.
But the Supreme Court ruling left an important issue unresolved. It said that assets in IRAs were protected only to the extent of what might be considered "reasonably necessary" to support the IRA owner and his or her dependents. Anything above that value could be seized by creditors (depending on the laws of the state of residence). But it didn't define what constitutes "reasonably necessary."
Slightly over two weeks later, Congress passed and President Bush signed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. Among its many provisions, the law resolved some questions left after the Supreme Court ruling and further strengthened protection of IRAs as well as plans for the self-employed.

Another take on it, and maybe a slightly different angle, here: IRA Protection: The good news: Your client gets more IRA creditor protection. The bad news? Your client is bankrupt.

Basically, searching for ERISA (Employee Retirement Income Security Act) information should help.

Consult a lawyer before you try and do anything that could get you sued.

Oh, and consider an umbrella policy. You buy umbrellas in $1mm increments and they generally cover you in addition to your standard policy. Through State Farm in Minnesota, I now have a maximum of $1.5mm in coverage if I'm in an auto accident ($1mm umbrella, $500k auto policy). All told, that set me back $100 a year... that's a fairly small price to pay if it helps you sleep better at night.

[kaneohe]

Webzter, Thanks for the Ed Slott reference: (very nice article)

"Does this new law now make it safer to roll 401(k) funds over to an IRA? The answer is no. Nothing beats the rock solid protection that 401(k)s and other qualified plans have under ERISA. ERISA protection extends to judgments other than bankruptcy, and it applies regardless of state law.

What if a client were leaving funds in a 401(k) solely for creditor protection purposes, because his or her state did not protect or adequately protect IRAs from creditors? If this were a real concern, then the bankruptcy law would not offer better IRA creditor protection than the client already has with a 401(k) plan. On the other hand, the law might enhance the protection enough in bankruptcy to make the client feel a little more secure about rolling the funds over to an IRA. ....................
While anyone can be sued for anything at any time, you would have to look at the trade-offs for leaving funds in a 401(k). Yes, clients might be protected from a lawsuit, but their beneficiaries might lose out on the important ability to stretch an IRA over time, which many company plans do not allow. In the end, that could cost them a fortune in lost tax-free compounding. "
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Sounds to me that leaving funds in the 401K still offers the best protection
since they are protected even if you don't file for bankruptcy . The apparent disadvantage of not being able to stretch the 401K mentioned in the last paragraph cited was later eliminated, I believe, by another law that permits 401Ks to be stretched if the company plan allows it.

[teejayevans]

Originally Posted by summer2007

I have heard or read many times that if you got sued for something like a car accident for example that your funds in your 401k or IRA cannot be touched.

I couldn't find out one way or the other if this is fact or fiction.

Just wondering if anyone knew for SURE if this is true or not?

I live in Pennsylvania if it differs state by state.

Jim

If you get sued, talk to a lawyer, will probably recommend you file for
bankruptcy, which protects some of your assets against
creditors. Since it's partly a state issue, no one can answer.
I believe DB plans are as safe, IRAs may or may not be or
may have limits, your principle residence may or may not,
everything else is up for grabs.
Somebody will mention that certain states protect IRAs if
transfer from a DB, while that maybe true, the key is if the
income derived from money is also protected.
Talk to a lawyer...
since my 401K provides a nice array of fund choices, I'll be
leaving my $ there.
TJ

[FinanceDude]

ERISA rules.........

[Martha]

Be careful when searching for information on the extent an IRA is protected from creditors. There have been lots of changes in the last few years, through court action and legislative action.

Be sure to read my signature line.

Under ERISA, certain qualified retirement plans are exempt from creditors. This includes defined benefit plans (pensions) and multiparticipant 401k plans. There has been some dispute as to whether ERISA fully protects solo 401k plans and 403b plans. ERISA does not protect IRAs.

If you file bankruptcy the bankruptcy code provides some protection over and above ERISA. All 401k plans, 403b plans, and 457 plans are fully exempt from creditors (actually all plans under 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code) . IRAs are exempt up to one million dollars in the plan. If money was rolled over into an IRA from a fully exempt plan like a 401k, then that rollover IRA is fully exempt. Here is a link to the federal bankruptcy exemptions: FindLaw for Legal Professionals - Case Law, Federal and State Resources, Forms, and Code

If you don't file bankruptcy, then what is exempt is a mix of federal and state law. ERISA provides protection for qualified plans as I described above. If a plan isn't protected by ERISA, then state law governs. This is of particular importance for IRAs and annuities. Some states provide full and complete protection no matter how much money is in the plan. Others have dollar limitations. Other states limit to amounts reasonably necessary for support. Minnesota, by way of example, has a dollar limit (I forget how much, some where around $50,000) plus amounts necessary for the support of the debtor or the debtor's dependents.

[Webzter]

Martha, you are awesome!