March 4, 2024



Welcome back to Advice, the advice column where real financial professionals answer real people’s questions. Topics can be anything in the world of finance, from retirement to taxes to wealth management—even advice within advice.

There are many factors that go into what retirement plan a person chooses to use. One factor that not everyone considered was whether the program would be immune to lawsuits.

But maybe they should. In fact, there are different rules for what can be seized from different accounts if the owner is successfully sued. Employer-sponsored plans, such as 401(k)s and 403(b)s, are regulated by federal law—specifically, Employee Retirement Income Security Act (ERISA) of 1974. However, individual retirement account (IRA) laws vary from state to state.

“Each state has different laws on whether creditors can attach an IRA,” says Fred Reish, chair of the trust services ERISA team at law firm Faegre Drinker Biddle & Reath. “California, for example, states that you can keep a reasonable amount for retirement. But if your amount exceeds that, the creditor can get it.”

Getting sued may not be the top fear of law-abiding citizens, but certain types of lawsuits are fairly common in the United States.15% of Americans Have Been Sued by a Debt Collector, According to a Study Consumer Financial Protection Bureau. This includes medical debt – more than two-thirds of U.S. hospitals sue patients for unpaid medical bills, according to U.S. Hospitals Kaiser Family Foundationa nonprofit health policy.

Meanwhile, hundreds of thousands of Americans are sued for divorce each year.According to statistics, in 2021 alone, there will be 689,308 marriages ending in divorce or annulment CDCThese are the court battles where retirement plans are most vulnerable, experts say.

“In divorce, it’s very common,” Reish said. “Either the plan is split between the spouses, or … one spouse says I’m going to keep the retirement plan, and the other says, ‘It’s okay, I got the house.'”

A retirement saver in New Jersey isn’t taking any chances. As a lawyer, she knew how hard the Americans could be hit, and she wanted to know where her savings could be best protected. Here’s what she wrote:

Dear Advisors,

Which retirement plan is safest from lawsuits? I recently heard that an IRA is not as protected as a 401(k) in the event the owner gets sued. Really?

I’m a 35 year old attorney in New Jersey and while I don’t want to be sued for any reason, I know it could happen at any time. I have a 401(k) and a Roth IRA containing $52,371.91 and $43,369.77 respectively. I don’t want to lose my retirement savings over a bent fender or some other dispute that gets out of hand. Should I put my IRA into my 401(k) plan, or the other way around?

thanks for your help,

jersey nervous

Here is the response from the financial advisor: