Asset protection- Vulnerability of Qualified Plans: ARTICLE

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State Laws May Make Some Qualified Plan Money Vulnerable to Creditors
by Shane Flait (2012) 

Qualified plans – often referred to as retirement accounts – are government-regulated savings accounts carrying tax-advantages as an incentive for workers to save for their retirement. Pensions, 401(k), and IRAs are examples of some well-known qualified plan. ERISA legislated some retirement account protection against creditors under bankruptcy laws. But state laws also affect that protection.

The government’s ERISA legislation offers complete protection from creditors for employer-sponsored qualified plans under bankruptcy. Your personal IRA (a non-employer plan) to which you contribute directly is protected only up to $1 Million. But a separate IRA created to receive only rollovers from employer-sponsored plans has unlimited protection.

It’s important to realize that the protection here is offered against creditors under bankruptcy. It is not protected from claims from either a former spouse or the Internal Revenue Service (IRS). 

Where State Law Plays a Part

Bankruptcy is ruled by Federal law. But for any legal action short of bankruptcy, it is your state law which determines how much protection your qualified plan assets actually have. So you’ll have to check what protection your state offers you for the plan in question.

State laws vary on protection offered for:

  • plan withdrawals,
  • inherited plans to beneficiary

IRAs are especially vulnerable. New York and Connecticut –like most states – will exemp all qualified plan assets but only while they’re in the retirement account. But other states limit how much is exempt from creditor actions. This could be a fixed amount – like $500,000 – or only what is ‘reasonably necessary’ to support the owner and his or her dependents if there a claim is lodged against those assets.

What’s ‘reasonably necessary’ in your case depends on your age, other holdings you have, and your obligations. That’ll be determined in a court under a claim made against you. Such vague terminology as ‘reasonably necessary’ tends to invite lawsuits.

If you rollover a company sponsored plan into an IRA for better control of your retirement investments, your assets may be better off back in your company plan if your state doesn’t offer much IRA protection against creditors..  

Beneficiary Protection of Inherited Plans:

Your plan assets may not be protected from your beneficiaries’ creditors after you die. Again, that’ll depend on what state they live in.


You may be better off shielding those assets by designating a trust as beneficiary of your retirement account. Of course the trust can benefit people you designate in the trust document.


Remember, competent legal help is essential in estate planning.






Shane Flait is a writer and educator