How to protect your retirement accounts from creditors

Perhaps you're close to filing for personal bankruptcy.  Maybe you borrowed too heavily in real estate and your net worth is getting wiped out as you take big losses.  It may be too late to create an irrevocable trust to save what you have left, so how do you protect the retirement savings you've built over the years?

Fortunately your retirement accounts automatically receive some degree of protection.  Here's how it works:

Money in qualified plans, like your company's 401k, get unlimited protection from creditors.  This means if you have $4 million in a 401k, and you lose your house, boat, and rental properties in personal bankruptcy, your $4 million is still yours. Creditors can take away just about everything, but they can't take away your retirement.

But there's a catch you'll want to be aware of so you don't lose this protection.  When people retire or leave a company, they often roll over their 401k account an IRA.  The good news is that the same unlimited creditor protection stays with you.  But be careful - if you want to make further contributions to an IRA, you'll need to open a separate IRA for those new deposits.  Don't mix your new contributions with the rollover money from your 401k because you'll lose the unlimited protection that you have now. 

Traditional IRA or Roth IRA accounts are protected from creditors too, but the protection is limited to $1 million.  For many people that might be enough today, but future growth in the account may eventually put the value well beyond $1 million. 

It makes sense to maximize the protection of your retirement money.  Being smart about how you structure and manage your retirement accounts is critical to ensuring you get the right combination of unlimited protection on qualified accounts and rollover IRA's, as well as the $1 million of protection for your contributory IRA.