In general, a person's interest in his or her profit sharing, pension, 401(K) and IRA plan is free from the reach of his or her creditors. Financial planners, insurance salespersons, banks and other institutions tout this rule as yet another reason for taking maximum advantage of these income tax deferral programs. Indeed, these plans do provide excellent savings opportunities coupled with favorable tax benefits. The creditor protection feature simply enhances their appeal. However, there are circumstances when a creditor can reach a person's interest in a retirement plan and only careful analysis by an experienced asset protection planner can guide the investor through the legal maze.
The following are just some situations where a person's retirement plan can be attacked and is vulnerable:
- Upon divorce, a spouse can seek to reach the accountholder's interest through a qualified domestic relations order.
- Would you be surprised to learn that while the retirement plans are protected against most creditors the IRS can take your plan account for unpaid taxes.
- The government can reach one's interest in a retirement plan to pay a criminal restitution order.
- If a person is in bankruptcy, his IRA is protected only up to a specified dollar limit which is tied to an index. Outside of bankruptcy, treatment varies from state to state but recognize the IRA is far less protected than pension, profit sharing and 401(K) plans.
- A single owner plan where the sole beneficiary is also the trustee.
In some cases, a creditor has immediate access to the debtor's account. In other instances the creditor must wait until the debtor is in pay status; that is, when the participant is first entitled to receive distributions. The rules are complex with numerous exceptions and a history of litigation. Only someone very familiar with the laws and experienced in their application can provide you with the guidance needed to insure that these very valuable assets are free from creditor claims. You may want to contact Weisman, Young & Ruemenapp, P.C. at 248.258.2700 for guidance with regard to the asset protection planning aspects of your retirement plans.