When planning for retirement there are many things to consider. However, one of the things that potential retirees usually do not consider is whether their individual retirement accounts are safe from lawsuits. And while federal government rules provide special protection for company-sponsored 401(k) plans, each state has its own individual rules for IRA accounts.
Here is a little background on retirement accounts:
What Is An IRA?
IRAs are accounts set up at a financial institution allowing individuals to save for retirement. These Accounts are generally tax-free or tax-deferred and can be used to protect assets for retirement necessities. The three main types of IRAs are: Traditional, Roth, and Rollover. Each type of IRA has different advantages and one might work for you.
What Is A 401K?
A 401(k) is an employer-sponsored retirement savings plan that lets workers save and invest a piece of their paycheck before taxes are removed. Taxes on any money taken out for 401Ks are not paid until the money is withdrawn from the retirement account. If money is withdrawn before retirement, taxes are taken out, as well as a penalty fee for early withdrawal.
What Is The Rule For Lawsuits And IRAs?
Unfortunately, there is no hard and fast rule when it comes to IRAs and their vulnerability during the course of litigation. Some states allow a judge to determine the specific amount of these accounts that can be awarded in a court ruling. This dollar amount usually varies from judge to judge and region to region.
What Is The Rule For 401(k) Protection?
Employer-sponsored accounts are protected by the Employee Retirement Income Security Act. As such, employer-sponsored 401(k) plans are generally safe from litigation. The only parties that can make claims on that money are the Internal Revenue Service or spouses.
What Does The Supreme Court Say?
In 2005, the U.S. Supreme Court ruled that generally, traditional and Roth IRAs assets are protected attachment or disbursement due to a lawsuit. However, an important issue was left unresolved when the court deemed that IRA money is shielded or dispersed only when it is considered “reasonably necessary” to support the IRA owner and any applicable dependents.
Accordingly, the ruling allows for seizure of IRA assets after the amount of money above has been accounted for. The silver lining is that, individual judges get to decide what is “reasonably necessary” when they determine if they will allow for attachment of IRA assets.
State Laws
The good news is that many individual state laws do provide protection to keep people from being completely wiped out by losing in a lawsuit. In fact, states like California do not allow award money to be dispersed from someone’s retirement plan if that person would need it to pay for “reasonable” life expenses. On the other hand, states like New Hampshire and Mexico have no specific law to address how IRAs can be dealt with in lawsuits. However, other states like Arizona, Texas, and Washington have extensive protections for IRA owners who face lawsuits. Specifically, Arizona limits creditor’s claims in a bankruptcy case to IRA contributions made within the last 120 days of the filing.
Double Penalties For Account Holders
Account holders must still pay taxes on IRA withdrawals and are subject to a 10 percent early withdrawal penalty if they are under the age of 59 ½ when the funds from their account are dispersed. Unfortunately, the penalties are required regardless of whether you are making the withdrawal because of a lawsuit or any other cause.
The Bottom Line
When it comes to protection of retirement accounts from litigation, it appears that 401Ks are a safer bet than IRAs. However, both are afforded more protection than general assets. If you have specific questions about your retirement accounts or legal issues related to these accounts, we encourage you to seek professional and qualified assistance with your case. This could mean seeing a tax professional, an account or a lawyer. Call our offices now to see if we can help you with your ERISA case!
Attorney J. Price McNamara Handles ERISA Case Issues
For a free legal consultation, call (225) 201-8311
Stop worrying about your retirement case issues and get the help you need from attorney J. Price McNamara. If you live in the Houston area or beyond, our ERISA firm has the skills and knowledge of ERISA law that you need to get the outcome you deserve for your legal case. Now is the time to get started on resolving your case, so call us today to schedule a free, no-obligation case review. With Attorney McNamara, you get an experienced ERISA professional on your side and that means piece of mind for a successful outcome in your case. Call us now to get things started.
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