Your retirement nest egg may be more vulnerable than you think.
Most states, including California, fail to provide regular individual retirement accounts and Roth IRAs with the kind of ironclad protection from creditors that is afforded pension benefits and 401(k) plans.
For the Record
Los Angeles Times Tuesday August 22, 2000 Home Edition Business Part C Page 3 Financial Desk 1 inches; 24 words Type of Material: Correction
Arizona income tax--An article in Friday's Business section incorrectly listed Arizona as a state that has no income tax. Arizona does tax the income of its residents.
That means, depending on where you live and how you've saved, you could lose some or all of your retirement money should you be sued or file for bankruptcy.
Engineer John K. Wong, 36, learned about this potential pitfall recently when he was about to roll over his 401(k) from a previous employer.
In an earlier job change, Wong had simply transferred his 401(k) savings into his new employer's plan. But this time his father-in-law suggested he roll the money into an IRA at discount brokerage Charles Schwab & Co. to take advantage of the much larger number of investment choices.
Wong was all set to do just that when a co-worker warned him that, in California, IRAs were more vulnerable than 401(k)s to lawsuits.
"He said a qualified 401(k) plan is safe from any court taking it in the event of a personal liability case, such as if someone slips and falls on your property, whereas IRAs are subject to available assets to pay out such claims," Wong said.
Actually, California law does shelter money in IRAs and Roth IRAs that is deemed necessary to support the saver and his or her dependents in retirement, said Bill Norman, a certified tax specialist and estate planning attorney in Century City.
Any excess, however, is indeed subject to creditors' claims in a lawsuit or bankruptcy.
Exactly how much would be protected is open to a judge's interpretation, Norman said.
"It's not necessarily an amount that would protect [someone's] current lifestyle," he said.
Although California law provides enough protection to prevent most workers from sinking into poverty, it may not be sufficient for high-earners, big savers and those who hope to pass some of their retirement largess to their children when they die.
Californians are better off than residents of some other states, who have even less protection. New Hampshire and New Mexico, for example, have no laws specifically protecting IRA savings from creditors.
Other states, such as Texas, Arizona and Washington, protect virtually everything inside an IRA from creditors. In Arizona, for example, only contributions made within the last 120 days can be subject to creditors' claims in a bankruptcy.
