When employees change jobs or retire, it’s a common practice for them to roll over the assets in their 401(k) accounts to an IRA. Generally, IRAs offer a broader variety of investment options than most 401(k) plans.
However, if you’re at risk of civil lawsuits or potentially facing claims from creditors, keeping your money in your 401(k) may be a better option.
Protection from most creditors and litigants
Because 401(k) plans are set up as trusts, they offer a level of protection for participants that IRAs, brokerage and bank accounts do not.
- If you declare bankruptcy, federal laws prevent creditors from making claims on your 401(k) account assets to pay them off.
- Debt collectors, most credit card and other creditors, and plaintiffs in civil suits can’t generally seize funds from your 401(k) accounts to pay off judgments or debts.
However, this protection is not universal.
- The IRS can place a lien on your 401(k) account for unpaid federal taxes.
- During a divorce, your ex-spouse can claim assets in your 401(k) account to pay for child support or alimony through a Qualified Domestic Relations Order (QDRO).
If you have questions or concerns about protecting your 401(k) and other assets, consider speaking with a trust attorney. They may be able to suggest other options for protecting your wealth.
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This article was authored by Michael Flaherty and Jeffrey Briskin. Michael is a senior financial advisor with Canby Financial Advisors, LLC, an Investment Adviser registered with the U.S. Securities & Exchange Commission. SEC registration does not constitute an endorsement by the SEC nor a statement about any skill or ability.Michael can be reached at 508.598.1082 or mflaherty@canbyfinancial.com. Jeffrey Briskin is Director of Marketing at Canby Financial Advisors.
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