Asset Protection and Retirement Plans

When you see the phrase “asset protection,” you may immediately think of wealthy people establishing offshore trusts. But most of us already have access to something that allows us to protect an unlimited amount of money: our company’s retirement plan. 

This includes 401ks, 403bs, deferred compensation or 457 plans, profit-sharing and money-purchase plans, defined benefit or pension plans and SEPs and Simple IRAs. Thanks to the 2005 changes to the Bankruptcy Act, all funds inside these accounts now have unlimited protection against creditors. 

And under the same law, regular IRAs (including traditional and Roth IRAs) are now protected up to a balance of $1 million, unless we deposit money into them from a qualified plan (more on that later). SEP and Simple IRAs are not included in this amount. 

But before you relax, consider when this protection would kick in. You would have to be sued, and the person suing you would have to win the case and obtain a judgment against you by the courts that says they have the right to pursue your assets. You would decide to file bankruptcy to protect yourself, and thus protect your assets. 

Yes, we’re saying you’d file bankruptcy to obtain this protection. Not an attractive prospect. 

Clearly, the first line of defense against unwanted lawsuits (aside from living a careful life) is having sufficient personal or professional liability insurance. But if you think you might have to rely on these new asset protection laws, keep the following in mind: 

• Manage rollovers carefully. When you leave a job and roll your funds from your employer plan into an IRA, be sure there’s a paper trail. For example, keep the final statement from your employer plan, the first statement from your new IRA rollover, and a copy of the transfer paperwork. I’d also recommend that you keep these funds in a separate IRA from other IRA funds, just to be safe. Remember, if the courts can’t distinguish these funds from your regular IRA, you won’t have unlimited protection.

• Small businesses should be sure their plans are well designed. If you’re not using a master or prototype plan document for your 401k or other plan (e.g., a turnkey plan from a mutual fund or brokerage firm), get a qualified professional’s help in designing your plan.

• Consider rolling IRAs into employer plans. This is a more aggressive strategy that hasn’t been tested yet in the courts, but could be helpful.

Delia Fernandez, MBA, PFP

Comments

[Expert Retirement Planning]

Well it's good news that the assest protection helps peoples future retirement planning. I'm somewhat curious about 403b's, and have little info on them. Guess I can always look it up online though. Good post.

http://www.expertretirementplanning.com