Retirement Income and Protection Plan Guidance: State-by-State

Year after year, you’ve dutifully saved for retirement. What happens if creditors come knocking? Do they have any right to seize your retirement funds, or is that money protected?

It depends. If you’ve stashed your money in one of several ERISA- (Employee Retirement Income Security Act) qualified plans, you’re usually safe. If not, your retirement savings could be at risk.

Creating the proper retirement income and protection plan can help you secure your future. The right plan can take advantage of resources such as Social Security, investments, and more. That said, determining what retirement plan to choose — and how to go about creating the right asset protection strategy — can sometimes feel overwhelming. How do you know what retirement plans offer the right protection? What does your state provide, and how can you take advantage of it?

At Blake Harris Law, we understand how uncertain this prospect might seem. That’s why we’ve put together a guide to help you understand more about retirement income and protection planning. Learn which plans offer full protection, and which don’t, discover what each state offers, and figure out asset protection strategies so that you can enjoy your golden years.

IRA Protection by State

IRA creditor protection varies by state. If you want to create a solid retirement income and protection plan, you need to have a solid understanding of what each state provides. Below, find out whether your state offers full or partial protection.

What retirement plans offer full protection?

For a retirement plan to offer full protection from creditors, it must be ERISA-qualified. According to ERISA, you can’t lose your retirement funds if your employer declares bankruptcy. Additionally, creditors can’t make a claim against funds in these protected retirement accounts.

ERISA-qualified plans offer creditor protection thanks to the anti-alienation clause. This clause says money put into an ERISA-qualified plan is held by the plan administrator for the benefit of participants. Participants aren’t allowed to freely transfer, sell, or give away the funds.

The clause also says your rights to benefits can’t be taken away. And, because an independent trust legally owns the funds until you withdraw them, creditors can’t take those funds to settle your personal debts.

It’s worth noting that ERISA-qualified plans aren’t always protected. You may have to give up the funds held within your plan in certain rare cases. Parties that can potentially seize your retirement assets include:

• The federal government, if you owe criminal penalties
• The IRS, to satisfy income tax debts
• Parties in civil judgments
• Your ex-spouse, if they have an interest in the benefits for child support or as a marital asset, though they would need to obtain a Qualified Domestic Relations Order (QDRO) to take assets in your plan

ERISA-qualified plans offer robust protection from creditors because you can’t set them up yourself. For a plan to qualify, your employer must set it up for you. Below, we’ll take a look at a few ERISA-qualified plans.

401(k)s

When you think of retirement plans, a 401(k) is probably what comes to mind. A 401(k) is a qualified profit-sharing plan that allows employees to contribute some of their wages to a retirement account. Employers can make contributions on their employee’s behalf, as well.

There are two kinds of 401(k) plans: traditional and Roth. The main difference between them is how the IRS taxes each plan.

With a traditional 401(k), you make pre-tax contributions. That means your contributions reduce your taxable income, but you pay taxes on the money when you withdraw it.

If you opt for a Roth 401(k), you don’t enjoy a tax deduction in the contribution year. Instead, you withdraw the money tax-free when you hit retirement age.

Both Roth and traditional 401(k) plans are ERISA-qualified and offer protection from creditors.

Pension Plans

If you’re of a certain age, you probably remember the good old days when it was standard for employers to offer their workers pension plans. With a pension plan, also called a defined-benefit plan, an employer commits to making payments into a retirement account for their employees. Such a plan either provides a set monthly payment for life or a single lump sum upon reaching retirement age.

Pension plans are quite rare these days, as it’s become the standard for employers to shift the burden of saving for retirement to employees. If you’re one of the lucky ones with a pension plan, you can rest easy knowing your retirement funds are safe from creditors.

Profit Sharing Accounts

Profit-sharing plans are appealing because they give employees a bit of their employer’s profits. Each employer can decide how much profit it wants to share with employees. Profits are based on an employer’s quarterly or annual earnings.

There are two main types of profit-sharing plans: cash and deferred. With a cash plan, the employer provides regular profit-sharing payments. With a deferred plan, an employee receives the full amount of shared profits as a lump sum, typically when they reach retirement age.

The majority of employers use the comp-to-comp method to calculate contributions to profit-sharing plans. Using this method, the employer first calculates the total compensation provided to all employees. Next, the employer divides an employee’s compensation by the total compensation to arrive at a percentage, which will represent that employee’s share of the employer’s profit.

Regardless of whether you have a cash or deferred profit-sharing account, your funds are protected from creditors.

403(b) Plans

403(b) plans are special retirement plans for employees of tax-exempt organizations, such as schools, libraries, and government facilities. Employees who can take advantage of a 403(b) plan include:

• Public school employees of Indian tribal governments
• Employees of state colleges, universities, and public schools
• Clergy members and ministers
• Church employees
• Employees of tax-exempt 503(c)(3) organizations

403(b) plans are similar to 401(k) plans. They have the same cap on contributions, which are made through payroll deductions. The main difference is that employees who are over 50 years of age can contribute an extra $7,500 per year as a catch-up contribution. This is helpful for employees who didn’t start saving for retirement until later in their careers.

In some rare cases, your employer might offer both a 401(k) and 403(b) plan. You may contribute to both, but your total contributions can’t exceed the maximum for each tax year ($23,000 for 2024).

Like 401(k) plans, there are two types of 403(b) plans: Roth and traditional. If you have a Roth 403(b), you’ll withdraw your funds tax-free upon retirement. For a traditional 403(b) plan, you pay taxes on the funds when you withdraw them.

403(b) plans typically offer protections from creditors, but not all of them are ERISA-qualified. Some employers choose a non-ERISA-qualified plan to save on administrative costs. This puts more money into your pocket, but if a creditor comes after you, they can potentially seize the funds in your plan.

457 Plans

The 457 plan is a tax-advantaged retirement plan for government employees as well as many employees of non-profit organizations. Similar to the 401(k) plan, employees can deposit a portion of their pre-tax earnings into an account. This lowers their taxable income for the contribution year, but the employee will owe taxes on the money when they withdraw it.

There are two main kinds of 457 plans: 457(b) and 457(f). The 457(b) is the more common plan, and it’s offered to employees of nonprofits and governments. The 457(f) plan is more rare. It’s only offered to highly compensated executives who work for tax-exempt organizations.

457(b) plans are appealing because they allow some early distributions for employees who leave their jobs. However, these plans do have some disadvantages. They offer fewer investment choices compared to private plans, and employer contributions count toward the annual contribution limit. Additionally, employer contributions are subject to a vesting schedule. If an employee quits, the non-vested funds are forfeited.

Some 457 plans are ERISA-qualified, while others aren’t. If you have a government-sponsored 457 plan, your retirement funds are held in a trust, so creditors can’t access them. Non-governmental 457 plans offer no ERISA protection. If your employer goes bankrupt, creditors can seize the assets in your plan.

Group Health Insurance Plans

Group health insurance is a popular benefit, and the majority of employers offer at least some type of health insurance benefit to employees. Examples of group health plans include an HMO, which requires you to seek a referral to see a specialist, and a PPO, which does not require such authorization.

Employer contributions to group health insurance plans are covered by ERISA and thus not accessible to creditors. Employer dental, vision, and prescription drug plans are covered as well.

Health Reimbursement Arrangements (HRAs)

HRAs are employer-funded plans that reimburse employees for qualified medical expenses. Some HRAs reimburse for insurance premiums as well.

An HRA isn’t an account like a 401(k) or IRA, so you can’t withdraw funds from it as you please. Instead, you must first incur a qualified medical expense and then request reimbursement from your employer. If you use up all of the funds allocated to the HRA for the year, you’ll have to cover your medical expenses out of pocket.

There are a few different types of HRAs. One is the Qualified Small Employer Health Reimbursement Arrangement (QSEHRA). This is a subsidy plan for employers with less than 50 full-time employees. For 2024, an employer with a QSEHRA can reimburse $12,450 per family and $6,150 per individual.

The Individual Coverage HRA (ICHRA) is a fairly new option that became available in 2020. Employees can use ICHRAs to buy their health insurance with pre-tax dollars. If your employer’s ICHRA doesn’t meet the minimum standards for affordability, you might be eligible for a premium tax credit to help you afford health insurance.

Expected Benefits HRAs (EBHRAs) are another type of arrangement that reimburses employees for health expenses. Employers sometimes offer EBHRAs in addition to group health insurance. With this arrangement, employers can reimburse employees up to $1,950 per year.

All funds used for HRAs, regardless of type, are ERISA-protected.

Health Flexible Spending Accounts (FSAs)

An FSA is a tax-advantaged account that allows you to set aside money for healthcare expenses. Employees choose how much money to contribute each year, and then that amount is deducted from their salary. This means that contributions to FSAs reduce your taxable income for the year you make them.

Depending on your FSA, your employer might give you a debit card that you can use to pay for health expenses as needed. Other FSAs may require you to submit a request for reimbursement after accruing qualified healthcare expenses.

FSAs can save you a lot of money in taxes, and they can be helpful if you have anticipated medical needs that require ongoing care such as a chronic condition. However, they’re a bit risky. If you don’t spend the money you contributed to your FSA in the same year you contributed, you could lose it. FSA contributions usually don’t roll over from one year to the next.

Regardless, FSA contributions are ERISA-qualified, so creditors cannot seize them.

Disability Insurance

You may be perfectly healthy now, but you never know when a medical disaster could strike. This is the exact scenario that disability insurance is designed for. If you become disabled and can no longer work, disability insurance will provide a percentage of your pay.

Some employers offer disability insurance as a benefit. If yours doesn’t, you can buy your own plan. Disability insurance premiums are usually fairly inexpensive, so it’s worth buying coverage to ensure you’re protected should the worst happen.

There are two kinds of disability insurance policies: short-term and long-term policies. Short-term policies usually pay benefits for up to one year. Long-term plans pay up to the maximum number of years that your policy will cover.

The main disadvantage of disability insurance is that it doesn’t provide fast cash. Both short-term and long-term plans have a waiting period before you can claim benefits. For short-term plans, this period is usually 90 days. Long-term plans can require you to wait for up to a year before they’ll start paying.

Life Insurance

Have you ever worried about what will happen to your family when you pass away? Once you’re gone, the loss of your income can put your loved ones at a big disadvantage. This is true even if you have a hefty savings account, the contents of which will run out eventually.

A life insurance policy could give you some peace of mind. In exchange for premium payments, a life insurance company agrees to pay benefits to your loved ones should you pass away. Your beneficiaries can use the benefits however they like.

There are two main types of life insurance: term life and whole life. Term life policies last for a specific number of years, usually 20 to 30. This is the least expensive option, but the policy has no cash value. Whole-life policies are more expensive but offer coverage for life. They have a cash value but may not offer a death benefit like term life policies do.

419(e) and 419(f) Plans

A 419 plan is an employer-sponsored plan that provides welfare benefits to employees. All 419 plans are ERISA-qualified because a trust holds the funds, so creditors can’t access them.

This retirement income and protection plan provides a host of benefits to employees. They can include:

• Death benefits (provide benefits to beneficiaries if you pass away)
• Long-term care benefits (to pay for assisted living or nursing home care)
• Severance benefits
• Supplemental disability benefits
• Post-retirement medical benefits

Like some other retirement plans, 419 plans allow you to set aside money and reduce that amount from your taxable income for the year.

What retirement plans offer partial protection?

Not all retirement plans are created equal. IRAs, for example, may offer some protection from creditors, but it depends on the state in which you live. In some states, IRA holders enjoy full protection. In others, you’re only protected from creditors if you file for bankruptcy.

SIMPLE, traditional, and Roth IRAs are some common options. Blake Harris Law is here to break down what each offers.

SIMPLE IRAs

SIMPLE (Savings Incentive Match Plan for Employees) IRAs allow employers and employees to contribute toward retirement. They’re commonly used by small employers that don’t sponsor a traditional retirement plan.

Annually, an employer must contribute either a 2% nonelective contribution or a matching contribution of up to 3% of the employee’s salary. Employees may make contributions as well.

Traditional IRAs

Traditional IRAs allow you to make pre-tax contributions to a retirement account. That means your money grows tax-deferred, and you pay taxes on it when you take a withdrawal. Traditional IRAs are generally more beneficial for people who think they’ll be in the same or a lower tax bracket once they reach retirement age.

Anyone with earned income can contribute to a traditional IRA, and there are no age restrictions. However, the IRS requires you to start taking distributions once you reach age 73.

In 2024, you may contribute up to $7,000 per year to a traditional IRA, or $8,000 if you’re over age 50.

Roth IRAs

With a Roth IRA, you contribute post-tax dollars. You won’t enjoy tax savings in the same year as your contribution, but you won’t owe taxes on your contributions once you start taking withdrawals.

Unlike traditional IRAs, Roth IRAs have income limits. In 2024, you can only contribute to one if your income is $161,000 or less. The limit is $240,000 for married couples filing taxes jointly.

As with traditional IRAs, you can contribute up to $7,000 in 2024, or $8,000 if you’re over 50. Roth IRAs don’t require you to take distributions by a certain age like traditional IRAs do. This means you can continue to let your money grow for as long as you want.

Roth IRAs are generally beneficial for people who think they’ll be in a higher tax bracket when they retire.

What About Rollovers and Inherited IRAs?

You may wonder if IRA rollovers and inherited IRAs are ERISA-protected. To fully answer this question, we must first explain what rollover and inherited IRAs are.

With a rollover, you can transfer funds from an old employer-funded retirement plan, such as a 401(k) plan, to an IRA. This allows you to preserve your tax-deferred status, and you won’t owe penalties for early withdrawal. It’s better than taking a cash distribution, which comes with a 10% early withdrawal penalty if you’re younger than 59 ½ years old.

Properly executed IRA rollovers are fully exempt from creditor seizure if you file for bankruptcy. Financial professionals often recommend setting up an account for your rollover IRA that’s separate from any other existing IRA accounts. Should you need to file for bankruptcy, this will make it easier to document your asset pools.

Inherited IRAs work a little differently. Inherited IRAs allow beneficiaries access to the deceased’s retirement funds when they pass away. In some states, creditors can seize the funds held in inherited IRAs if the death beneficiary inherits the IRA outright. The only way to prevent this is by placing distributions into a discretionary spendthrift trust. The trustee then has the authority to use the distributions to pay expenses for the beneficiary.

Using Asset Protection Strategies for IRAs

You’ve got an IRA, and you’re worried that creditors will pilfer the hard-earned money you’ve socked away for retirement. This is very upsetting, but you’re not completely at the mercy of your creditors. You do have some asset protection strategies available to you. Take the time to explore your options to create the right retirement income and protection plan for your needs.

File for Bankruptcy

The first option is to file for bankruptcy. If you file for bankruptcy, federal law protects traditional and Roth IRAs up to $1,512,350. SIMPLE and SEP IRAs are fully protected.

There are a few exceptions, though. If you owe your former spouse money for alimony or child support, they can come after your IRA funds even if you file for bankruptcy. So too can the IRS if you owe back taxes. Additionally, if you go to prison for committing a crime, the government has the authority to seize part of your retirement accounts.

The decision to file for bankruptcy is not one to take lightly. Although it stops creditors from breathing down your neck, it does have quite a few drawbacks.

The first drawback is that it destroys your credit, and bankruptcy can remain on your credit report for up to or over 10 years. You may be unable to buy a house or make other large purchases until you rebuild your credit. If you want to buy a home, your only option may be to look for a co-signer.

Secondly, if you file for Chapter 7 bankruptcy, you’ll have to sell off non-exempt assets to help satisfy your debts. If you opt for Chapter 13 bankruptcy, the court will use the value of non-exempt assets to negotiate a payment plan with creditors.

Lastly, you must consider bankruptcy filing fees, which can be expensive. Filing fees start at around $300. If you hire a bankruptcy attorney for guidance, you could pay $1,000 or more.

Self-Directed IRA LLC

Your second option is to open an offshore self-directed IRA LLC. In all states, creditors cannot seize the assets of an LLC to satisfy the debts of an individual. That means if you own 100% of your LLC, creditors cannot go after your IRA assets outside of that LLC.

The only exception is if the creditor is able to obtain a charging order. With a charging order, a creditor can obtain the LLC owner-debtor’s financial rights.

Establishing an offshore LLC is a rather complicated process, so you’ll probably need to hire an attorney to help you through it. Here’s the general gist of how it works:

1. Pick a name for your LLC, then register it with an appropriate offshore jurisdiction and file your articles of organization. You’ll have to pay a fee to do this. Some countries charge a one-time fee, while in many others, you must pay an annual fee to keep your LLC running.
2. Apply for an Employer Identification Number (EIN) for your LLC. You may also apply for an EIN for the IRA you’re using to start the LLC.
3. Select a registered agent. The agent you select must be physically available to accept legal paperwork.
4. Create an operating agreement that establishes that the IRA owns 100% of the LLC. You, yourself, cannot own the LLC. If you’re the owner, creditors can seize your IRA assets.

Once you’ve set up your LLC, you’ll have to tread very carefully. No income from investments in the LLC can go into your personal accounts. All expenses paid out for investments in the LLC must be paid out by your IRA.

You’ll also have to consider taxes. Some investments in LLCs will trigger unrelated business tax income (UBTI). UBTI largely applies to trade or business income. It doesn’t apply to passive income generated through royalties, dividend rights, rental income, or interest, so long as you invested using only IRA income.

Reliable Retirement Income and Protection Plan Guidance From Blake Harris Law

Your retirement is supposed to be a time to relax more and worry less. After decades of working, you should be able to relax and enjoy your twilight years. A solid retirement plan can help you make sure that you have the resources you need to continue your lifestyle, even when you no longer work for your income.

Unfortunately, not every retirement plan will provide you with the assistance you need. IRAs, in particular, may be vulnerable to creditors should you have outstanding debts. As such, you may find your money is in jeopardy.

If you own an IRA and worry that creditors may come after your hard-earned money, reach out to Blake Harris Law. Our attorneys can advise you on your state’s IRA exemption laws and provide strategies to help you protect your valuable retirement accounts. We can provide you with advice about creating a solid retirement income and protection plan, offer ongoing support, and much more to help you protect your assets. Give our law firm a call to learn more about how we can help you protect your assets as part of retirement planning.