How important is 401k/403b's greater protection against creditors?

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secondmoment
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How important is 401k/403b's greater protection against creditors?

Post by secondmoment »

I'll be retiring soon, and we are currently considering possible rollovers of my existing 403b accounts (one at Fidelity, the other at TIAA).

I've heard three different people mention today that employer plans such as 401k's and 403b's offer greater protection against creditors (bankruptcies, liability, etc) than IRA's do. I'm trying to get a handle on how important this would be. I don't see myself declaring bankruptcy during my lifetime, and (perhaps I'm naive) I can't think of a likely situation where any liability wouldn't be covered by my various insurance policies.

Do many of you feel that this aspect of protection against creditors is an important one for most retirees?
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cheese_breath
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Re: How important is 401k/403b's greater protection against creditors?

Post by cheese_breath »

Not important at all if you don't default on your bills.
The surest way to know the future is when it becomes the past.
Nick341981
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Re: How important is 401k/403b's greater protection against creditors?

Post by Nick341981 »

Why not leave your assets as protected as possible and use a Roth conversion ladder to get access to them while leaving the bulk protected? I can't think of a good reason not to.
Spirit Rider
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Re: How important is 401k/403b's greater protection against creditors?

Post by Spirit Rider »

Retirement plans covered by ERISA do provide the highest degree of asset protection. However, you should be aware of the fact, that most 403b plans are not covered by ERISA.
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secondmoment
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Re: How important is 401k/403b's greater protection against creditors?

Post by secondmoment »

Spirit Rider wrote:Retirement plans covered by ERISA do provide the highest degree of asset protection. However, you should be aware of the fact, that most 403b plans are not covered by ERISA.
In my case, one of my 403b's is ERISA, but the one from the other company isn't.

The question I'm trying to answer is: how much should I care, if I'm reasonably confident I'll never have financial problems that could lead to bankruptcy or collections action?
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cheese_breath
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Re: How important is 401k/403b's greater protection against creditors?

Post by cheese_breath »

The thing you need to understand, and you probably already do, is reasonably confident is not a guarantee. Are you willing to take the risk of an unexpected financial surprise demolishing your finely laid plans? I don't know anybody who can answer that question but you.

I'm reasonably confident, and so far I've been right. But that doesn't prevent a possibility I might be sued tomorrow or diagnosed with some financially expensive medical issue.
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ResearchMed
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Re: How important is 401k/403b's greater protection against creditors?

Post by ResearchMed »

Many bankruptcies are due to major medical problems, which typically aren't predictable.

Having excellent medical insurance helps with the actual medical expenses, although not always quite as much as expected (obviously this will vary).

But what about loss of a job for an extended period, or inability to return to similar-paying work?
And the possible extra expenses (medical aide, housekeeping help, transportation to medical visits/rehab, grocery shopping... friends/family can only keep helping so much...) that can add up to a surprising degree?

IF the ERISA-protected 403b has some reasonable investment choices, then why *not* keep a nice chunk of money there?

RM
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TMQ206
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Re: How important is 401k/403b's greater protection against creditors?

Post by TMQ206 »

Creditor protection for IRAs is variable by state, including treatment of inherited IRAs. Some states have robust creditor protection which may be approximately equivalent to ERISA protection, depending on where you live.
dbr
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Re: How important is 401k/403b's greater protection against creditors?

Post by dbr »

There is a difference between bankruptcy credit protection and non-bankruptcy liabilities and the issue is state dependent.
betterdays
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Re: How important is 401k/403b's greater protection against creditors?

Post by betterdays »

TMQ206 wrote:Creditor protection for IRAs is variable by state, including treatment of inherited IRAs. Some states have robust creditor protection which may be approximately equivalent to ERISA protection, depending on where you live.
Can anyone provide a link to the individual state coverage?
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secondmoment
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Re: How important is 401k/403b's greater protection against creditors?

Post by secondmoment »

ResearchMed wrote:Many bankruptcies are due to major medical problems, which typically aren't predictable.

Having excellent medical insurance helps with the actual medical expenses, although not always quite as much as expected (obviously this will vary).

But what about loss of a job for an extended period, or inability to return to similar-paying work?
And the possible extra expenses (medical aide, housekeeping help, transportation to medical visits/rehab, grocery shopping... friends/family can only keep helping so much...) that can add up to a surprising degree?
These seem like reasonable factors to consider. We're in an HMO with pretty complete coverage, so we don't expect direct medical expenses to be an issue. But general care costs as we age are worth considering. Loss of job won't be an issue, as we'll be retired.
IF the ERISA-protected 403b has some reasonable investment choices, then why *not* keep a nice chunk of money there?
Investment choices don't seem to be the issue. It really appears to come down to this: Employer ERISA plans appear to offer better creditor protection, but they also (at least in our case) require paper requests with notarized spousal signoff to initiate transactions. The latter seems very inconvenient, and if everything else were completely equal, we would roll over to a company and account type that gives us a more convenient management interface (phone/online transaction requests). But if the creditor protection issue seems as though it could be important, that could outweigh the transaction convenience factor. I don't imagine we will be tweaking our distributions constantly.

One option I'm thinking about would be to leave our ERISA plan (which constitutes about 3/4 of our tax-deferred assets) untouched as long as possible, until required minimum distributions anyway, and take any distributions in the early retirement years from our other 403b (the other 1/4 of our tax-deferred assets), which does not appear to be ERISA.
TMQ206 wrote:Creditor protection for IRAs is variable by state, including treatment of inherited IRAs. Some states have robust creditor protection which may be approximately equivalent to ERISA protection, depending on where you live.
dbr wrote:There is a difference between bankruptcy credit protection and non-bankruptcy liabilities and the issue is state dependent.
We need to talk to an attorney anyway to draw up estate documents, so it sounds as though we should bring up this issue. We're in California.
OnTrack
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Re: How important is 401k/403b's greater protection against creditors?

Post by OnTrack »

TMQ206 wrote:Creditor protection for IRAs is variable by state, including treatment of inherited IRAs. Some states have robust creditor protection which may be approximately equivalent to ERISA protection, depending on where you live.
Is where you live the only consideration? What if a person is is sued for a car accident that occurs in a different state from where he or she lives?
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jimb_fromATL
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Re: How important is 401k/403b's greater protection against creditors?

Post by jimb_fromATL »

cheese_breath wrote:Not important at all if you don't default on your bills.
... And provided you also never have any financial setbacks such as accident, injury, illness, lawsuits or judgments or other claims against your assets that you cannot easily afford to pay out of petty cash.

jimb
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Just sayin...
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Re: How important is 401k/403b's greater protection against creditors?

Post by Just sayin... »

betterdays wrote:
TMQ206 wrote:Creditor protection for IRAs is variable by state, including treatment of inherited IRAs. Some states have robust creditor protection which may be approximately equivalent to ERISA protection, depending on where you live.
Can anyone provide a link to the individual state coverage?
Here's the one I know about:

http://moranknobel.com/news/State_Laws_ ... g_IRAs.pdf
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cheese_breath
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Re: How important is 401k/403b's greater protection against creditors?

Post by cheese_breath »

jimb_fromATL wrote:
cheese_breath wrote:Not important at all if you don't default on your bills.
... And provided you also never have any financial setbacks such as accident, injury, illness, lawsuits or judgments or other claims against your assets that you cannot easily afford to pay out of petty cash.

jimb
Those would create more bills to not default on. :D
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cherijoh
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Re: How important is 401k/403b's greater protection against creditors?

Post by cherijoh »

TMQ206 wrote:Creditor protection for IRAs is variable by state, including treatment of inherited IRAs. Some states have robust creditor protection which may be approximately equivalent to ERISA protection, depending on where you live.
+1

In my state (NC), retirement plans are classified as exempt property (i.e., cannot be seized), but the exempted homestead amount is minimal ($35K).
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