en you’ve spent decades saving for your golden years, the last thing you want is to lose your hard-earned money in a lawsuit or to creditors. To prevent that from happening, we’ll show you how to protect an IRA from lawsuits.
In this guide, we’ll explain how retirement accounts actually work, where legal risks can sneak in, and how to protect your retirement from lawsuits using time-tested asset protection strategies that actually work in real life.
Understanding IRAs and Retirement Accounts
Before you can learn how to protect your retirement from lawsuits, you need to understand what exactly it is that you’re protecting. Here are some basic details about IRAs and other popular retirement accounts.
What Are IRAs and How Do They Work?
An IRA (Individual Retirement Account) is a tax-advantaged way to grow your wealth for retirement. Unlike a 401(k), which is tied to your employment, an IRA is something anyone can set up.
To fund an IRA, you contribute pre- or post-tax dollars to the account, depending on whether it’s a traditional or Roth IRA. The funds you deposit into your IRA then grow tax-deferred until you withdraw them. The tax structure of these accounts helps IRAs grow faster than traditional investment accounts, so the money that would normally go toward taxes gets reinvested instead.
Are IRAs Protected if You Get Sued?
If you lose a lawsuit, your creditors may go after your non-retirement assets first. But what about your IRA? Unfortunately, federal law offers limited protection, and state law varies wildly. Some states fully shield IRAs from lawsuits, others cap protections at a certain amount, and a few states offer almost no legal advantages. In short, you can never be totally certain that state or federal law will keep your retirement safe. To get true peace of mind, you have to know how to protect an IRA from lawsuits using other methods.
Explaining the Employee Retirement Income Security Act (ERISA)
IRAs are vulnerable to lawsuits because they’re not covered by the Employee Retirement Income Security Act (ERISA). This act provides employer-sponsored plans like 401(k)s, pensions, and profit-sharing accounts with protection from creditors and lawsuits under federal law. Unfortunately, IRAs fall outside most ERISA protections. This means you’ll need to take extra steps to protect your retirement from lawsuits, especially if your retirement savings are heavily IRA-based.
Qualified vs. Non-Qualified Retirement Accounts
When an account is “qualified,” it is protected under ERISA. Qualified accounts are offered by employers to provide employees with a tax-advantaged way to save for retirement. Common examples of qualified plans include:
- 401(k)s
- 403(b)s
- Profit-sharing plans
- 457 plans
Non-qualified accounts receive minimal protection from lawsuits. If you use non-qualified accounts as your primary method of saving for retirement, you need additional asset protection tools to keep your assets safe. Some examples of non-qualified accounts include:
- IRAs
- SEP IRAs
- SIMPLE IRA plans
- Individual investment accounts
How To Protect Your Retirement From Lawsuits
If you want to protect your retirement from lawsuits, you can’t solely rely on the protections offered by ERISA and your state government, especially when it comes to keeping non-qualified accounts safe. To ensure that your retirement remains secure, consider using the following tools:
- Domestic Asset Protection Trusts (DAPTs) – These trusts are available in 17 states, and have been around since 1997. People living in the U.S. can use them to shield their assets from creditors, especially if they live in a state with advantageous DAPT laws, like South Dakota or Nevada. However, DAPTs don’t work equally well everywhere and may not protect residents of non-DAPT states.
- Offshore Asset Protection Trusts (OAPTs) – Most asset protection professionals consider OAPTs the gold standard of wealth defense. These trusts are immune to U.S. court rulings, meaning that even if you lose a lawsuit, all the assets inside of an OAPT will remain beyond the reach of your creditors. The quality of an OAPT depends on the jurisdiction in which it’s established, with the strongest being located in the Cook Islands, Nevis, and Belize.
- Limited Liability Companies (LLCs) – Placing your IRA or retirement plan inside a properly structured LLC can help keep your accounts safe if you get sued. Any lawsuits specifically aimed at you cannot impact your LLC, provided you’ve done a good job of keeping your business and personal expenses separated.
- Insurance and Annuities – Supplemental protection, like umbrella liability insurance, can limit your overall risk exposure.
Keep in mind that you can, and should, use these tools together. For instance, if you form an offshore asset protection trust, creating an offshore LLC is a great way to retain some control over your trust-held assets.
Lastly, you should know that the type of retirement account you have will influence the type of asset protection you need. Unfortunately, an IRA cannot be transferred into a trust while you are still living. So, if you wish to use an IRA in your lifetime, you should consult a financial professional to determine what makes the most sense for your situation. However, if you have other retirement savings, like a standard investment account or a high-yield savings account (HYSA), those can be transferred to a trust. You can also name the trust as a beneficiary of the IRA if you intend to leave your account to someone after you pass away. In all cases, it’s a good idea to consult an asset protection professional to determine how best to protect your retirement from lawsuits.
Call Asset Protection Planners for Help Protecting Your Retirement From Lawsuits
You don’t have to figure out how to protect an IRA from lawsuits on your own. The experienced team at Asset Protection Planners has helped thousands of clients protect their retirement from lawsuits and financial predators. We design custom structures tailored to your goals, your state laws, and your risk level to help you get the protection you deserve.
Call us today to schedule a free consultation with an asset protection planner.
