Creditor Protection in Retirement: What to Know
As retirement nears, it’s natural to think about whether you have adequately protected your money. After all, you have carefully saved and built up your nest egg over your working life. Protecting your money from creditors is only too real of a concern should a financial disaster happen.
The good news is, yes, most of your retirement assets are protected in one way or another. The bad news is that the protection is mostly a matter of state law. As a result, the details depend on where you live.
In this article, we will talk about the various creditor protections that you may have in retirement. Keep in mind that this is general information and isn’t intended to be legal advice. If you have any questions about your personal situation, talk to your financial professional and to an experienced attorney.
Retirement Assets in General
Most accounts set up under the Employee Retirement Income Security Act of 1974 (ERISA) are protected from seizure by creditors. This ERISA protection extends to employer-sponsored plans, such as 401(k) plans, pensions plans, and even some 403(b) plans. However, in that case, the 403(b) plan must fall under ERISA, and many 403(b) plans don’t. You can check with your plan administrator to see if it’s an “ERISA governed” plan.
Now, back to our discussion of protection. Even if you have large debts or have declared bankruptcy but also have considerable sums in these kinds of accounts, your creditors generally can’t access these funds.
IRAs, whether in traditional or Roth flavors, aren’t protected by ERISA. However, the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) protects your IRAs for up to $1,512,350 per person (for all plans combined).
If you are rolling money from a 401(k) to an IRA, it’s unclear whether this limit would apply since ERISA rules might still cover those funds. Outside of bankruptcy, the protection relies on state laws.
One thing to remember at the outset of bankruptcy is that you will be required to use the state’s exemption list in most states. However, some states allow you to choose between state or federal exemptions.
Nonetheless, you must choose. You aren’t allowed to pick and choose between the two. If you use the state exemptions, you should look at the chance to use the federal nonbankruptcy exemptions.
Federal Nonbankruptcy Exemptions
These federal nonbankruptcy exemptions can be quite powerful. For example, your retirement benefits are fully exempt if you are a:
- Civil, foreign, or military service employee.
- Railroad worker.
- CIA employee.
- Military Medal of Honor Roll.
- Social Security benefit recipient.
That last category brings in most of us, especially in retirement. Generally, you are eligible to use these exemptions if you are using your state’s exemptions.
State Bankruptcy Exemptions
Each state provides exemptions for certain kinds of property in a bankruptcy proceeding. Generally, for example, the state will permit someone to retain a certain amount of equity in their home and in their car.
These exemptions vary widely from state to state. For example, Indiana only exempts $19,300 of equity in real estate or tangible property. In contrast, New York, which sets its homestead exemption by county, ranges from $179,950 to $89,975 in equity.
Remember, though, that equity isn’t the value of your home. It’s the amount you own of it. If you own a $200,000 house but have a $185,000 mortgage, your equity is only $15,000.
Annuity Protections in Bankruptcy
Some people who own an annuity for retirement won’t have placed it in an IRA. What’s more, until very recently most 401(k) plans didn’t offer annuity choices.
So, your annuities will be protected, if at all, by state bankruptcy exemptions. A 50-state chart is attached with this material, and that chart was current at its creation then in 2017, but some highlights follow.
You are home free if your annuity meets the Internal Revenue Service Code qualified retirement account rules. Your annuity will be exempt from creditors.
A similar federal exemption exists for an annuity funded from an IRA or specific other non-qualified retirement plans. However, your exemption is capped at $1,513,350 for all plans combined. Even capped, that is a significant sum, and it resets every three years.
If you are considering filing for bankruptcy and have significant annuity and retirement assets, remember this. It’s prudent to consult with a professional familiar with the impact of bankruptcy on your retirement annuities before making your initial filing.
Other Federal Annuity Exemptions
Even if you are using the state exemptions, the bankruptcy code itself includes an exemption for an annuity that will pay when you are ill, disabled, die, reach a certain age, or service sufficient time.
If your annuity is from a structured settlement for a bodily injury, wrongful death, or lost future earnings, it will also be exempt under federal annuity exemptions (and most states).
State exemptions for annuities are all over the place. Some states, like Kansas and Missouri, only exempt retirement annuities. Other states base their exemptions either on the monthly income stream from your annuity (e.g., Montana up to $350 per month) or by assets (e.g., Nebraska up to $100,000 accrued proceeds, cash values, or benefits).
In either case, you may find more help with the federal nonbankruptcy exemptions here.
Finally, some states will only protect an annuity over six months old. Even if you don’t live in a state with that requirement, bankruptcy trustees tend to be suspicious of major purchases close to a bankruptcy filing. Keep this in mind if you are thinking of purchasing an annuity and then declaring.
Some Final Thoughts
Protection of your money from creditors is important, but it’s just one part of your retirement financial picture. Other crucial retirement issues are having enough lifelong income for your lifestyle, making sure your money keeps up with inflation, being well-prepared for healthcare and long-term care expenses, and more.
If you are looking for a financial professional to help you with these “what-ifs,” it may be helpful to work with someone who is independent and not captive. In other words, since they are independent, the financial advisor or agent is free to shop around for products from multiple companies and not just one parent company. That can give you more options for your financial goals and situation.
If the thought of working with someone independent appeals to you, many independent and experienced financial professionals are available here at SafeMoney.com. You can get started by visiting our “Find a Financial Professional” section, where you can connect with someone directly and request a first appointment to discuss your situation. Should you want a personal referral, please call us at 877.476.9723.