Are My Retirement Funds Safe From Creditors?
Q. I understand that in certain circumstances IRA and 401(k) money may be protected from a lawsuit. However, if a person is retired and has rolled over their ERISA plan to an account with a financial institution, are those funds still protected?
A. Generally speaking, yes.
The laws can vary by state.
"Under federal law, pension plans such as a 401(k) fall under the Employee Retirement Income Security Act (ERISA) and are protected from creditors," says Anthony J. Vignier, a certified financial planner and attorney with Vignier Investment Group in Kearny, N.J. "This includes protection if filing for Chapter 7 bankruptcy protection," he said. (In New Jersey, the funds are protected from most creditors.)
Vignier said federal law exempts $1 million in an IRA for Chapter 7 filers.
A few exceptions from creditor protection are domestic relations orders for spousal or child support, and an IRS tax garnishment or lien.
He said New Jersey provides retirement accounts with 100% protection from creditors under N.J.S.A. § 25:2-1(b).
"This protection applies not only to IRAs, but also Roth IRAs, SEP-IRAs and other similar qualified retirement vehicles," he said. "In a Chapter 7 bankruptcy, New Jersey exempts all of your IRA. You can choose the federal or New Jersey exemption when filing for Chapter 7 bankruptcy protection."
You do not want to co-mingle IRA and 401(k) funds unless you are well below that $1 million level, said Jerry Lynch, a certified financial planner with JFL Total Wealth Management in Boonton, N.J.
"If you are rolling money out of a 401(k) plan, you need to put that money in a separate 'Rollover IRA' and not mix funds from a traditional IRA," Lynch said. "As long as you do that, your funds are protected."
Vignier said some of the best protection you can have against potential creditors is to have adequate insurance coverage. You should do a yearly checkup of your policy coverages for home, auto and medical to verify that you have sufficient coverage.
If you're a professional such as a doctor, lawyer, etc., you should also make sure to have adequate professional malpractice insurance.
"Another often overlooked insurance protection strategy is getting an umbrella liability policy," Vignier said. "It's cheap and can offer great protection when other insurance falls short."
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