Uncle Sam does asset protection

04 Jul Uncle Sam does asset protection

The Holy Grail of a certain set of financial/business planners is “asset protection“: have the benefit of your assets while keeping them locked away from your creditors. Asset protection strategies run the gamet from straight forward to sleazy to fraudulent.

Too often overlooked by the less than filthy rich is the government’s asset protection scheme: ERISA qualified retirement savings. Get this: your creditors cannot reach money you hold in a 401(k) plan or similar retirement vehicle.

In bankruptcy, the story gets better: everyone filing bankruptcy, regardless of the exemptions otherwise available to them, can exempt up to 1 million dollars in an IRA.

I have yet to see a bankruptcy client with a million dollar IRA; many of my clients have invaded their retirement savings, savings that their creditors can’t reach even with a judgment, in an attempt to pay their debts.

I see them when they have exhausted their retirement savings without having made a meaningful dent in the debt. But whatever remains in a debtor’s ERISA qualified retirement accounts is safe from creditors, along with their IRA.

Most Americans are woefully under prepared financially for retirement, especially my clients who are trying to pay off credit card debt. I strongly discourage using retirement savings to pay down debt. Premature withdrawals trigger their own kind of new debt in the form of taxes and penalties. Given the savings performance of most, premature withdrawal or 401(k) are not enough to pay off the debt, either.
Consumers mired in debt can safely go bankrupt without losing their retirement nestegg . I urge them to then put their financial energies to saving for a self sufficient retirement.

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Cathy Moran, Esq.

I'm a certified specialist in bankruptcy law (California State Bar Board of Legal Specialization) practicing in the San Francisco Bay Area for more than 30 years. In addition to practicing bankruptcy law, I train new practitioners at Bankruptcy Mastery.
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