Aug 14, 2024
Picture a pretty minor, single-car accident that leads to a total wreck — as in wiping out your savings.
That's apparently the scenario facing Jennifer in Georgia, who's now worried about her assets in the event of one more collision.
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An article on Clark.com recounts Jennifer’s concerned call with the finance website.
“My auto insurance provider has scared me that any future car accident at the fault of anyone in my household could result in me losing everything, including my savings,” she said.
Hearing those words from an insurance rep may sound chilling, but the question remains whether such a retirement account seizure is possible in the first place. And the answer, as with so many things involving money and misfortune is: it depends.
Looking at things from a legal angle, some retirement accounts offer more protection than others. In simple terms, an employer-sponsored 401(k) offers a better shield than any IRA, be it Roth or traditional.
Here’s how that breaks down when it comes to keeping your nest egg safe.
How ERISA safeguards (many) retirement accounts
First, let’s decode the acronym ERISA, which represents the cornerstone of retirement account security. Turning back the clock half a century, the Employee Retirement Income Security Act of 1974 created protections for retirement accounts established in private industry.
ERISA requires employers to set minimum standards for participation, vesting, benefit accrual and funding. It also protects your employer-sponsored retirement account from creditors, bankruptcy proceedings, civil lawsuits — and even employers themselves. For example, If a business goes bust your ERISA-qualified retirement plan would not be affected. The federal government’s Pension Benefit Guaranty Corp. shields those funds.
There are important exceptions, though. Plans offered by governmental entities (such as state pensions) or churches fall outside ERISA protections. And if you work for a small business, you may instead have what’s known as a SIMPLE (or Savings Incentive Match Plan for Employees) IRA plan.
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And where IRAs are concerned, the lack of federal ERISA protection leaves it up to individual states to decide the matter. And that’s where things can get mighty complicated.
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'Kicking and screaming' into IRA land
Let’s revisit Jennifer’s case. She lives in Georgia, where only certain accounts are protected — and only up until a certain point. This chart from Blake Harris Law compiles the guidelines for all 50 states, and when you check out the Peach State, you’ll see that things aren’t always peachy.
SIMPLE and traditional IRAs are protected in Georgia, but Roth IRAs are not. Even then, “distributions are only exempt to the extent necessary to support the debtor and any dependents,” the firm notes. In other words, you may be left with enough to live and not the high-life retirement you pictured.
Protection laws vary by state. Some offer cover up to a certain amount, while others offer only partial protection for different accounts.
It’s important to be wary of these protections, for example, in cases when you leave an employer and face the big rollover question. Entering into the self-employed life, you likely face no other choice than to set up an IRA. Or, if your new job offers a terrible 401(k), the financial advantages of a robust IRA may outweigh ERISA’s full shielding.
For what it’s worth, Clark recommends caution against IRA sales pitches.
“I know there’s a big push by people in the financial business to get you when you change an employer to dump your old 401(k) into an IRA or whatever else they’ve dreamt up for you,” a representative stated in the article. “But you need to be brought kicking and screaming from going from a 401(k), usually, into an IRA.”
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Lou Carlozo is a freelance contributor to Moneywise.
