How to protect retirement accounts from judgment creditors in California
There are ways in which you can protect your retirement accounts from judgment creditors in California. If you are a resident of California, and a judgment creditor secures a judgment against you, that judgment creditor may be able to obtain funds from your retirement account. However, that is less likely to occur if you have a 401(k) or profit-sharing plan, both of which are protected in California. Other kinds of retirement plans, such as IRAs, are more susceptible to collections from judgment creditors. The ability of a judgment creditor to access your account in California is dependent on the kind of retirement account you possess, and the amount of funds it contains.
Judgment creditors are forbidden by federal law to try to collect funds in a pension plan that was established under the Employee Retirement Income Security Act (ERISA). In order to acquire protection from creditors, your ERISA account is required to be a qualified retirement plan or an employee welfare benefit plan that is covered by ERISA. Among the pension and benefit plans that have coverage under ERISA are 401(k) plans, pension and profit-sharing plans, group health and life insurance plans, dental and vision plans, health reimbursement accounts (HRAs), health savings accounts (HSAs) and accidental death or disability benefits.
However, if your retirement account does not fall under ERISA, then a judgment creditor may be able to take possession of it. The reason is that some non-ERISA accounts in California are lacking in the same safeguards as ERISA accounts. Some of the non-ERISA accounts that may be seized by creditors are IRAs, Roth IRAs, SIMPLE IRAs, SEPs, Keogh Plans, 403(b) plans for those who are employed by a public school or university, “employer-only” plans, or those that do not help employees, and plans for the government or church.
Under California Code of Civil Procedure §704.115, assets controlled by a private retirement plan are exempt from seizure by creditors. Thus, funds held in private retirement plans are safe from creditors, even after you withdraw the funds and deposit them into your bank account. But since creditors are not always aware of the origin of your funds, it is recommended that you deposit your retirement distributions into a separate bank account. Therefore, in case a creditor attempts to seize your funds, you will be able to provide proof regarding the source of the funds.
In light of the lack of protection from creditors for IRAs, the next time you leave one employer for another, you may wish to refrain from rolling your 401(k) savings over into an IRA. Although California law shields funds in IRAs and Roth IRAs that are considered necessary to support the owner and the owner’s dependents during retirement, any surplus can be collected by creditors if you are the defendant in a lawsuit or facing bankruptcy.
If you are concerned about the security of your assets, there are measures you can implement to set your mind at ease. You can increase your insurance coverage, including your liability insurance, which can offer protection from a lawsuit. Liability coverage is included in your homeowner’s and auto insurance policies, but the amount of coverage is usually restricted to a ceiling of $500,000.
If you possess considerable retirement assets, you may wish to think about an umbrella liability policy, which is also referred to as a personal liability policy, which can offer additional coverage up to a maximum of $10 million. Insurance specialists advocate that your minimum liability coverage should be the equivalent of your net worth, and several experts advise that you should have two to five times that figure. With respect to retirement rollovers, it may be more beneficial to leave the funds in your 401(k) plan from your previous employer or transfer your 401(k) savings into your new employer’s plan rather than roll it over into an IRA.