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Retirement Plans Double As Asset Protection Tool

By Robert G. Yetman, Jr. Editor At Large

We are a sue-happy nation. Some (lawyers, mostly) would tell you that it’s a sign of a more evolved system of justice that it is now possible for people to seek civil redress as easily as they can through the court system, but most of us accept that notion with at least a few grains of salt; even though there are all kinds of sound, legitimate reasons for which people sue others each day, the ease with which people can file a lawsuit in America has also allowed for an approach by which all kinds of bases for suing another…no matter how ridiculous…are flung against the wall to see what sticks.

This feature to our society has made more prominent the concerns over asset protection. Significant levels of asset protection can be cost-prohibitive for all but the wealthiest folks (who are usually the most at risk), but even “average” people have some relatively ready-made mechanisms at their disposal to help shield their hard-earned dollars…and they come in the form of retirement plans.

The best and most recognizable of those is the 401(k). 401(k) plans are covered under the Employee Retirement Income Security Act of 1974 (ERISA). ERISA-qualified plans (there are a few others, like defined benefit and profit sharing plans) are completely protected from creditors by federal law. This means that even if someone had to file for bankruptcy in the face of a judgment, whatever he had in his 401(k) would be protected. Traditional and Roth IRAs, which are not ERISA plans, enjoy some protection in this way from federal law, but it is not complete; IRAs are protected up to $1.25 million, but many states now fully protect IRA assets, so you should check the laws in your state to see just how protected your IRA is.

Asset protection is a complex issue, a fuller treatment of which falls outside the scope of this piece, and if you have concerns in this area, you should consult with an attorney who specializes in this area of the law. However, for most of us, it’s good to know that the retirement plans we generally have at our fingertips also double as asset protection vehicles; remember that, the next time you find yourself debating whether to bother making your contribution.