Ask Your Advisor: Which Retirement Plan Is Safer from Lawsuits, a 401(k) or an IRA?

Financial Advisors


Welcome to Ask an Advisor. An advice column with real financial experts answering questions from real people. The topic can be anything in the world of finance, from retirement to taxes to wealth management. And even advice about advice.

Many factors go into what kind of retirement plan a person chooses. One factor not everyone considers is whether the plan is litigious.

But you probably should. In fact, there are different rules about what can be seized from different accounts if the owner succeeds in litigation. Employer-sponsored plans such as 401(k) and 403(b) are regulated under federal law. Retirement Income Security Act However, individual retirement account (IRA) laws vary from state to state.

Fred Reich, head of the fiduciary services ERISA team at law firm Fegre, Drinker, Biddle and Lease, said, “There are different laws in each state as to whether a creditor can seize an IRA. ‘ said. “California, for example, says you can keep as much as you reasonably need after you retire. But if you have more than that, your creditors can get it.”

While being sued may not be among the top concerns of law-abiding citizens, certain types of lawsuits are very common in the United States. According to a survey, 15 percent of Americans reported being sued by debt collectors. Consumer Financial Protection Bureau. That includes medical debt, with more than two-thirds of his US hospitals suing patients for unpaid medical bills, according to the report. Kaiser Family Foundationa non-profit organization on health policy.

Meanwhile, hundreds of thousands of Americans are sued for divorce each year. In 2021 alone, 689,308 marriages ended in divorce or annulled, according to the report. Centers for Disease Control and Prevention. And experts say legal battles are where retirement plans are most vulnerable.

“In a divorce, it’s very common,” Reich said. “Either we split the plans. One spouse says I’m keeping the retirement plan, and the other spouse says, ‘Okay, I’ll get the house.’ ”

A retirement saver in New Jersey is taking no risks. A lawyer by profession, she knows how prone Americans are to litigation and wonders where her savings are best protected. Here is what she wrote:

Dear Advisors,

Which retirement plan is the safest from lawsuits? Recently, I heard that an IRA doesn’t provide as much protection as a 401(k) if the owner is sued. TRUE?

I am a 35 year old attorney in New Jersey and do not expect to be sued for any reason, but I am aware that it can happen at any time. I have both a 401(k) and a Roth IRA containing $52,371.91 and $43,369.77 respectively. I don’t want to lose my retirement savings to a fender bender or other unruly strife. Should an IRA be rolled into a 401(k) or vice versa?

thank you for your help,

tension in new jersey

And here is the response from the financial advisor:



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