I was recently talking with a CPA in my network, and he told me how he attended a continuing education seminar on how “retirement plans are the best form of asset protection available.” Although retirement plans offer some asset protection, and should be a part of everyone’s asset protection strategy, they are not the end all be all of asset protection. Nor are they the best form of asset protection available.
There are two categories of retirement accounts: ERISSA Accounts (401K, profit-sharing plans, pension plans, monty-purchase pension plans, stock-bonus plans, and employee stock-ownership plans), and Non-ERISSA Accounts (most common are IRA and Roth IRA).
Federal law protects ERISSA Accounts from the owner’s creditors. However, there are several exceptions: (1) ERISSA plans are not exempt from IRS tax liens. Tax liens are actually fairly common among small business owners. (2) ERISSA plans are subject to being split in a divorce proceeding, and also the ERISSA plan money is not exempt from alimony and child custody payments. (3) Inherited ERISSA accounts probably aren’t exempt from creditors. A US Supreme Court case recently said that inherited ERISSA accounts aren’t exempt in the bankruptcy context. It is logical that a court would extend this reasoning to a normal creditor of the person who inherited the ERISSA plan. (4) The retirement fund is only protected as long as it is in the fund. When it comes out of the fund (i.e. distribution) then it is no longer exempt. Here, Oregon law picks up the slack a little, and exempts $7500 of accumulated ERISSA funds from garnishment. However, don’t forget that a large ERISSA fund could have quite sizable Required Minimum Distributions.
Non-ERISSA plans are exempt under Oregon State law, which is similar to the federal protection of ERISSA plans, with a couple of exceptions. First, 75% of a beneficiary’s interest in a plan, or 50% of a lump sum disbursement or withdrawal is exempt from a domestic support obligation. Second, traditional and Roth IRAs have an exemption limit of $1,000,000 (adjusted periodically for inflation) under federal bankruptcy law. Other than those two exceptions, Oregon law does not protect non-ERISSA plans from the above listed federal ERISSA exceptions.