If you’re facing an expensive lawsuit without a fund set aside to account for creditor costs, it’s natural to wonder where the money will come from. You’ve worked hard to build up assets and save for retirement, but will those retirement accounts be exposed to creditors should other assets and funds not cover it?
Certain assets are able to easily be liquidated to cover these events, but does it even make sense to pull from a retirement account early? Thankfully, certain retirement accounts in California are protected from lawsuits–but others may not be.
Which Retirement Accounts Are Protected From Lawsuits?
One of the primary protections provided under federal law is for employer-based retirement plans covered under the Employee Retirement Income Security Act (ERISA). This includes a variety of plans, including most:
- 401(k)s
- 403(b)s
- Profit-sharing plans
- Health Flexible Spending Accounts (FSA)
- Health Reimbursement Arrangements (HRA)
- Health Maintenance Organization (HMO) plans
- 419(a)(f)(6) and 419(e) welfare benefit plans
The protection offered by ERISA is because these accounts are technically not owned by you but by your plan administrator. This distinction makes it difficult for creditors to access these funds directly.
No matter which state you reside in, your ERISA-qualified retirement funds are generally secure from seizure. However, there are exceptions to this rule. If you owe money to the IRS, or if you are involved in disputes related to child support, alimony, lawsuits concerning your actions against the plan or plan administrators, or dividing assets in a divorce, these funds may be exposed.
Which Retirement Funds Can Be Exposed to Creditors?
Not all retirement funds offer the same level of protection against lawsuits and creditors. Individual Retirement Accounts (IRAs), such as traditional or Roth IRAs that you fund yourself, don’t have the same protections. These accounts may be exposed at different levels depending on the state. In California, these accounts are protected only up to the amount necessary to provide reasonable support for you, your spouse, and your dependents upon retirement (all assets and accounts will be taken into consideration before exposing an IRA).
The implication here is that any amount in your IRA exceeding what is deemed necessary for a reasonable retirement can be subject to creditor claims. This exposes these funds to potential litigation risks, which can affect the scope of your retirement lifestyle. If you were planning a more luxurious retirement, this level of exposure could significantly impact those plans, leaving you with less than you might have expected.
Protect Your Retirement Savings From Creditors
At Dahl Law Group, we implement sound and effective asset protection plans that protect against various circumstances that may otherwise put your retirement plans at risk. This includes preparing for potential litigation that exposes your hard-earned retirement funds. It’s important to implement a strategy that mitigates or eliminates the possibility of losing savings to a lawsuit. To protect your retirement plan, contact Dahl Law Group at our offices in Sacramento or San Diego today.
Dahl Law Group
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