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Home > Blog > Understanding Asset Protection Limitations Within Your Self-Directed IRA and Solo 401(k)

Understanding Asset Protection Limitations Within Your Self-Directed IRA and Solo 401(k)

Do Personal Financial Problems Put My Retirement Fund Assets at Risk?

When you take a look at the news in the last few years, you regularly come across terms like “economic meltdown”, “recession”, “financial crisis”, and a whole suite of other words that make the typical consumer cringe. Many of us can personally relate. Every day when interacting with friends, family, and coworkers, we hear talk about foreclosures, bankruptcy, high personal debt, layoffs, and unemployment. These disturbing scenarios inevitably lead to the question: what happens to my retirement fund in the event of a bankruptcy or personal financial disaster?

Bankruptcy – Your Retirement Accounts Are Protected

In 2005, new federal asset protection laws were passed pertaining to bankruptcies that exempt tax-qualified retirement plans, (e.g. pensions, profit-sharing and 401(k) plans,) from being included in bankruptcy proceedings. Traditional and Roth IRA accounts that are funded by the debtor enjoy a similar limited exemption from bankruptcy proceedings. The government had mandated that the first one million dollars in an IRA account is excluded from the bankruptcy estate. In simple terms, your 401(k) investments are completely safe from bankruptcy, while your personal IRA retirement accounts receive a great deal of protection.

Protection for Accounts Outside of Bankruptcy

In general, 401(k) qualified retirement plans are awarded total exemption from creditors whether inside or outside a bankruptcy. For personally funded or Self Directed IRAs, protection from creditors outside of bankruptcy is determined by individual state law.  These different levels of federal and/or state creditor protection present a number of asset planning challenges and opportunities.

Although the self directed platform offers superior investing tools, rolling over may not always be the best idea. If you left an employer where you held a 401(k) qualified plan, rolling over assets into an IRA may adversely impact the protection of the assets. If you have over a million dollars in rollover holdings, or if you live in a state where IRA assets are not protected from creditors, you may be better off leaving your funds in the employer-sponsored plan.

Inheritance is also a factor to be considered. If you plan to leave at least some of your IRA to family other than your spouse, the assets may or may not be protected from your beneficiaries’ creditors. Once again, this will depend on state-specific regulations. One popular workaround which provides protection for the IRA assets is to place the IRA in a trust. This will safeguard your family from any potential beneficiary creditors.

Another unfortunate situation which can impact a retirement fund is divorce. If you are going through a divorce or are planning divorce proceedings, it is imperative to speak to a qualified financial professional. The laws can get complicated and any hasty mistakes that are made now can be hard to rectify later.

Broad Financial – Solutions for Asset Protection

Call us today at 800.395.5200. Our specialists have years of experience in the realm of retirement plans and asset protection. Now you can get the answers you need in order to insure proper asset protection for your own 401(k) and IRA accounts.

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