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How are your retirement assets protected from creditors?

| August 07, 2023

Not everything in financial planning is exciting. Making money is fun. Growing your money is fun. Spending your money is even more fun. Figuring out how to protect it – not as much fun. It’s often that section of the financial plan that gets glossed over. I think that’s for three reasons:

  1. It doesn’t seem value-adding
  2. It can actually feel value-destroying, as it can cost money (e.g. insurance premiums, hedging)
  3. The rules aren’t always clear

That said, it’s important. No getting around that. What are we protecting from? Any myriad of concerns, including:

  1. Market volatility
  2. Liability and creditor concerns (lawsuits and/or bankruptcy)
  3. Estate tax and distribution issues
  4. Bank failures (e.g. FDIC, SIPC, NCUA coverage)

A few weeks back, we looked at risks and protections around bank failures, and we’ve addressed estate considerations in numerous prior posts (contact us for those). Today, we’re going to look at the topic of liability and creditor concerns, normally stemming from lawsuits, specifically as it relates to your retirement assets. There are a number of factors that go into determining what account type to utilize in your retirement savings efforts. Cost, convenience, contribution limits, management, and more all play a role. One of those “more” items is often overlooked, and that is making sure that your assets are maximally protected from liability and creditor concerns. Understanding this has then the added benefit of helping you fine-tune things like your umbrella (“excess liability”) insurance coverage – a key element of protecting the financial plan of anyone with modest to significant means. More on this below.

There are different rules for what can be seized from different accounts if the owner is successfully sued. Employer-sponsored plans, such as 401(k)s and 403(b)s, are regulated under federal law – specifically, the Employee Retirement Income Security Act (ERISA) of 1974. The laws for individual retirement accounts (IRA), however, can vary from state to state. Fortunately, here in Washington state, the laws related to IRAs are very favorable – on par with the protections offered to workplace accounts under ERISA. Other states are not as kind. For example, according to attorney Fred Reish, one of the preeminent experts on ERISA, "California says you can retain the amount reasonably needed for retirement. But if you have more than that, the creditors can get to it." I’ll go out on a limb here and guess that your assessment of “reasonably needed” probably differs from that of the courts, and we’re not talking about a difference that lands in your favor! Note that rules like this are not exclusive to California, as you can see on this site.

An important part of this discussion is understanding that non-retirement accounts are not protected, in general (even if you intend the assets to be used for retirement). This can help further the argument for parking as much as possible into tax-preferred retirement accounts rather than brokerage accounts, though many different considerations come into play here (as they do everywhere).

Coming back to retirement accounts, what does all of this mean for you? If you are in a state like Washington where the protections are full and complete for an IRA just the same as they are for ERISA-covered accounts (e.g. 401(k)), you can rest a bit easier. You can also eliminate “liability and creditor concerns” from the list of considerations as you decide whether an IRA or 401(k) is the right account type for you. Also, you can reduce the value of your net worth that is exposed to liability concerns as you calculate your needed umbrella liability coverage. Let’s look at an example:

You may have noticed that we said “Partial” as it applied to your home. This is because of the “homestead exemption” that applies in Washington State. This exemption helps protect your home from seizure but is limited to the greater of $125,000 or the county median sale price of a single-family home in the preceding year. In our example, we’ve assumed the median sale price is $750,000, which is clearly greater than $125,000, and thus is chosen for use in the calculations. Homestead exemption laws vary from state to state.

So, if we put all this together, we can see that rather than needing a ~$3.0 million umbrella policy, this client would need, at the most, $1.0 million in coverage.

If, however, you reside in a state like California, the calculations would look a bit different. For this example, we’ll assume that the client “reasonably needs” 50% of her IRA assets to fund her retirement. We’ll also assume she qualifies for a $600,000 homestead exemption (the rules are complicated). In that case, this client might consider the following:

  1. Rolling her IRA into her 401(k), if eligible – thus protecting the full value of her retirement assets from creditors. She would need to weigh this consideration against the potential benefits of maintaining the IRA.
  2. Ensure she has taken out an umbrella liability insurance policy with a coverage limit of $1.5 million, as demonstrated in the calculations below.


As we have hopefully demonstrated here in a clear and concise way, thinking about liability protection for your retirement assets is important, and the considerations do vary depending on where you live. This, then, has a spillover effect in how it impacts your need for umbrella liability protection. By no means is this an exhaustive discussion on the ins-and-outs of liability concerns and means of protection. Those discussions need to happen in concert with your financial advisor, insurance agent, and attorneys. What’s important is that you start those conversations and pay close attention to that section of your financial plan that addresses protection. After all, the fun of spending money is only available if you still have it to spend!