Welcome to Radical Personal Finance, a show dedicated to providing you with the knowledge, skills, insight, and encouragement you need to live a rich and meaningful life now, while building your plan for financial freedom in 10 years or less.

Today we continue our asset protection planning series, wherein I try to equip you, to arm you with some knowledge of the tools that are available to you to help protect your nest egg, to protect your fortune.

After all, if you're going to do the hard work of piling up thousands, hundreds of thousands of dollars, millions of dollars of assets, you also need to be equipped of how to protect those assets.

And so we are working our way through this asset protection planning series.

For context, we are in the middle of talking about exemption planning.

We've talked about some of the different ways that the types of attacks that you can face, some of the different risks that you face.

We've talked a little bit about asset protection broadly.

And we're jumping into what I consider to be the most practical and the lowest hanging fruit in asset protection planning, which is exemption planning.

It's not necessarily the best asset protection planning.

It's not necessarily the most comprehensive.

It may not even be the right place to start, but it is the lowest hanging fruit for the most numbers of people.

So In episode 606, which was part 5 of this series, we talked about homestead exemption planning.

I explained to you the rules relating the protection of your personal homestead where you live from the claims of your creditors.

And the challenge with homestead planning is it's very state dependent.

There are some states that are wonderful for homestead planning and there are some states that are horrible for homestead planning.

Today's topic, retirement account exemption planning, is going to be the most broadly applicable exemption planning that you can engage in.

And that's because retirement protections, specifically the protections for your retirement accounts from the claims of creditors, are governed largely by national federal legislation.

Now there are some important components of state legislation, but they're largely governed by federal, U.S.

National federal legislation, which is applicable in all 50 states.

And if you live in a commonwealth of the United States or a U.S.

Territory, I don't have a clue if it's applicable to you or not.

But at least this is applicable to people who live in these 50 United States.

If you invest money through what is called an ERISA qualified plan.

ERISA, of course, stands for the Employee Retirement Income Security Act, passed back in the mid-1970s.

If you invest through an ERISA qualified plan, a plan that meets all of the requirements of the Employee Retirement Income Security Act, the funds that you invest in that ERISA qualified plan are protected from the claims of your personal creditors.

They are also protected from the claims of your company's creditors.

And this is because 1 of the requirements of ERISA is that a pension plan must be structured as a spendthrift trust.

It has to make sure that the assets in the trust cannot be encumbered.

And so those fund assets are protected from creditors.

Now, what types of plans, most normal people, non-financial advisors don't use the term ERISA qualified plan.

Basically a 401k plan or a 403b plan or other qualified plans.

There are other variations of these, other pension plans, perhaps a divine benefit plan that is ERISA qualified.

Other pension plans do cover, do cover this, have these same features.

Now, what is not an ERISA qualified plan?

Well, the most common ones would be something like an IRA or a Roth IRA or a SEP IRA or other types of Keo plans.

So these are the kinds of plans that are not ERISA qualified plans.

So we'll get to that exception in a moment, but I want to, again, just lead with the most important thing, which is if you invest through an ERISA qualified plan, the assets in that plan are protected from the claims of your creditors.

This is helpful because you can put a lot of assets into a 401k account.

401k accounts are some of the most useful forms of asset protected accounts for people.

They're very common, so they're easily accessible.

Yes, you can go and set up an offshore LLC and use that to hold your assets in a private vault in some Western European country.

You can do that, but that's not exactly common.

It's easy to fund an ERISA qualified plan.

After all, your 401k administrator holds seminars to try to get you to sign up for it.

You can call your HR manager and they're trying to get you to do it.

And in fact, even if you have a small company, in a small company, the company's owners are begging you to do it so they don't have to have a safe harbor plan so they can make their own contributions.

If you're the employee and not a key person, not a highly compensated employee, They want you to put money into the plan so that they don't have to follow the highly compensated employee rules.

So everybody is begging you to put money in your 401k.

The federal government is begging you to put money in their 401k because all of their pension schemes, the social security and all the rest of the stuff, those are all bankrupt.

So about the only thing you have to plan for is your own assets that you save through a 401k plan or through a 403b plan.

So everybody is begging for you to put money into these plans.

Another great thing about these types of plans is for most people, for the vast majority of people, you can put huge contributions into these plans.

And I'm defining huge in comparison to your income.

For a person who has a median income of $50, 000 per year, you can easily put More than a third of your income into that 401k plan and then if your company matches you on top of that You can have an excess of $20, 000 per year going into that plan Pretty easily now if you make a million bucks a year that 20 grand that you can put in is not going to be that big of a mark on your plan.

But for most people, this represents a very large funding mechanism that they can use fairly easily.

401k plans generally have good investment options inside of them.

And if your plan doesn't have good investment options, you can swap out the company and find a company that does produce good investment options.

And so these are really attractive for reasons other than asset protection.

But when you now add on the fact that the protection of your assets from somebody suing you in an ERISA qualified plan is essentially sacrosanct, now we have a very compelling feature.

If you put retirement account exemptions together with the knowledge of homestead exemptions, you can protect quite a bit of your money.

The most famous case that is always referenced and alluded to to prove this is the case of OJ Simpson, the football player.

Now, if you'll remember, OJ Simpson was, of course, prosecuted in federal court.

He was found not guilty of murder in federal court.

He wasn't locked up as a criminal, he was found not guilty.

But he was found guilty in a large civil case with those same facts.

And in the case that he was found guilty of a civil case, he lost a very large settlement.

But OJ Simpson had done 2 things well, according to at least the news reports I've read about it.

Number 1, OJ Simpson had purchased land in Florida, a large house in Florida, and in Florida with an unlimited Homestead exemption protection, exemption for your house, that house was protected from the claims of his creditors.

Even though he lost the case, his Florida house was still protected.

The number 2 thing that OJ Simpson had done well is he was the beneficiary of a pension plan.

His NFL pension provided him with an income.

And under these rules that we're talking about today, pension income for an appropriately qualified plan is exempt from the claims of creditors.

So even though he may have lost other assets, he still had a very sizable pension income and a very nice place to live.

That's a good example of how asset protection planning can protect you when facing somebody who wants to take all of your money.

If he had owned a house in another state, or if that pension plan had simply been all sitting in bank accounts, O.J.

Simpson would be working today instead of, I think he's in jail right now, for something else.

He would be working, trying to provide his income somewhere else.

Now, can you imagine for a moment trying to get a job if your name is OJ Simpson?

Can you imagine how many employers and employment opportunities you would have to work through in order to try to figure out how to get a job if your name is OJ Simpson?

The first obvious thing you would do is change your name.

And even though there would be some record of that created that was always accessible, at least you could work under a legally assumed name and try to get some work there that way.

You would obviously try to start businesses that didn't involve your name.

I mean, there are ways that you can solve those problems, but this is what people face.

When your name has been plastered over, in his case, every possible media source, it changes your life.

Look, think about the same thing for your your situation.

Let's hope that your name is not OJ Simpson, but perhaps you are the highly publicized litigant in a case against you in your town.

Maybe it's not international news, but your name is day after day, week after week, splashed across your local newspaper, put up on the local news.

Think about how difficult it can be to get a fresh start and hit and just do the things that most people think are normal in that circumstance.

That's 1, a good example of why we do asset protection planning.

So retirement accounts are your first line of defense in terms of exemption planning here.

Because of these benefits of retirement accounts, many people should give them more attention than they do.

Now, there are risks to retirement accounts, which I'll cover in just a moment.

But because of this aspect, many people should prioritize investing into their 401k account.

Let me touch on a question that we continually wrestle with here on the show.

That question involves paying off debts versus investing.

I've used this first when talked about homestead exemptions.

But let's say that you live in a state that doesn't offer any meaningful homestead exemption amounts.

You have a $20, 000 homestead exemption protection.

And let's say that you think it's reasonable, realistic that you have some perhaps elevated threat where somebody may come after your assets.

Well, every dollar that you pay against your home mortgage in your estate is a dollar that can potentially be taken by your creditors.

Every dollar that you put into a bank account is potentially a dollar that can be taken by your creditors.

Whereas Every dollar that you put into a bank account is potentially a dollar that can be taken by your creditors.

Whereas, every dollar that you put into your 401k is a dollar that's protected from the majority of your potential creditors.

And in terms of lawsuit risk, all of your creditors.

So now this has to tilt things in a different direction for you.

You should now place a higher priority on making those 401k dollar contributions and a lower priority on paying off the mortgage or paying off a certain line of credit.

So you have to factor this into your individual situations.

Now are 401k dollars absolutely bulletproof?

Just like when we went through homestead exemptions and I pointed out to you that the value of the money in your homestead is not protected from your local taxing authority or I think 1 of the ones I even forgot to go over in that show.

1 of the worst is the value of the money.

If you live in a homeowner's association, the value of your asset inside that homeowner's association is not protected from the claims of even the homeowner's association, here in Florida.

When I was a young man, I helped somebody who was, was, was being threatened with, foreclosure on their condo by their condo association, because they were in arrears on their condo fees.

And I called up and this is just as long before I was a financial advisor, I just called him up as a friend and I spoke to the lawyer and the lawyer informed me something that was shot quite shocking to me that the condo association had the right to foreclose basically at any time once their fees were unpaid.

How the local condo association had so much power later went out and proved that it was true.

It's a very big reason to avoid buying property inside of a homeowners association or condo association if you can avoid it, because you now give a local, usually often poorly run organization claims over what can be a very significant asset for you.

Now, not everything is that bad, but be careful.

So the point is that even though you might own a property and it's protected from many creditors, doesn't mean that it's protected from all creditors.

Your primary mortgage holder can still foreclose on you.

Just because somebody can sue you and can't get at that money doesn't mean your mortgage company can't sue you and take the money.

So what are the risks for asset protection in a 401k plan, in an ERISA qualified plan?

ERISA plans are not protected from claims by the IRS.

If the IRS claims that you owe them money, they have the legal right to take the money in your ERISA qualified plan.

It's not as big of a problem as being sued is, but it's a major problem for many people because the IRS can make mistakes.

You can get into a battle with the IRS, or if you're in a contentious situation with the IRS, don't think that the money in your 401k plan is protected.

It is not protected from federal tax claims.

The next important area where it's not protected is from federal criminal fines and restitution orders.

If you, if OJ Simpson had been found criminally liable, criminally guilty, excuse me, let me use the right language, criminally guilty in his, in the most famous case, if he had been found criminally guilty, and if the judge had ordered him to pay a fine in addition to jail time, then in that case, his NFL pension would have been invaded to satisfy that fine.

So criminal fines or criminal restitution orders are not protected.

Your 401k or ERISA qualified plan is not protected from child support payments, alimony payments, and it's not protected from divorce claims.

Just about anybody who's gone through divorce court, who has known anybody who has gone through divorce court, understands that this is the case where that asset is not protected.

Now, even if the 401k plan is not immediately distributed, it's very common that it's not.

Let's say that I'm enrolled in a 401k and my wife and I divorce and the judge grants her a certain percentage of that 401k balance.

Well, what happens is she enters in and they enter in what's called a quadra, a qualified domestic relations order in with my 401k plan administrator, which legally entitles her to 50% or whatever the appropriate number is of my 401k plan.

She's legally protected there, but the money is just not distributed immediately in that scenario.

So, divorce, child support, alimony, those are the major situations where the 401k plan is not protected.

But if you can steer clear of federal criminal prosecution and being found guilty, if you can steer clear of fighting with the IRS and them coming and taking that money for a tax claim, and if you can steer clear of child support payments, alimony payments, and divorce court, then the money that's in your ERISA qualified plan is very well protected.

Now let's pivot away from an ERISA qualified retirement plan and talk about retirement plans that many of us use that may not be ERISA qualified.

A Roth IRA is not protected by ERISA legislation.

A traditional IRA is not protected by ERISA legislation.

This forms a major problem because 1 of the standard tropes of financial advice, which I'm ashamed to say, I have also been guilty of giving, it was simply this, you know, if you're not the way I used to say it, before I knew better, it was, I used to say, if you're not at your old job, your 401k shouldn't be there either.

If you're not at your old job, your 401k shouldn't be there either.

And there are some really compelling reasons to consider rolling out money from a 401k plan when you leave a job into an IRA.

You may have a much broader range of investment options.

Your 401k menu of investment options may feature maybe 30 or 40 different mutual funds that you can invest in, but nothing beyond that.

Whereas an IRA could conceivably be invested in almost anything.

Obviously you need to avoid the specifically prohibited transactions.

You can't invest your IRA in a life insurance contract, for example.

But, if you had a self-directed IRA, you could invest in a broad range of things.

But more commonly you can invest in any mutual fund company.

If you roll it over to an IRA, you can also gain benefits like lowering your expenses.

If you were to roll your IRA, your 401k plan out of, your employer plan into, an individual IRA, then you can invest with the lowest cost provider that you can find.

And over a period of years and decades, that can be very compelling in terms of the amount of money that it saves you.

Many 401k plans, 403b plans are very poorly run, have very poor investment options and are very expensive for you.

That's a real problem, or it can be a real problem.

Now here you need to research your specific state.

Talk to an asset protection attorney or perhaps a bankruptcy attorney in your state and understand the rules of your states.

For example, my state of Florida is very careful and the state of Florida has provided and bestowed the same protection, the same unlimited creditor protection on IRAs or Roth IRAs, as is found in the federal legislation for qualified accounts, such as a 401k plan.

It's 1 of the reasons why I like the state of Florida.

I have a whole long list of, laundry list of things that, that I don't particularly like that the Florida government does, but at least they're serious about, protecting people from the claims of creditors, at least they're serious about not passing income taxes, and you start to put those things together, and it's a very compelling state, especially since there are decent levels of freedom in other areas of life that are important to me.

If I were to move from a state like Florida to perhaps a state like New Mexico, which doesn't even have any laws that protect IRA savings from creditors, I would face a trouble with that.

That would cause me to have to rework my asset protection plans.

So you will have to research your particular state because your state will determine whether or not your IRA is protected and depending on the details of your situation you should pay careful attention to that.

In a moment I'll go over a long list of things that you could possibly do to protect an IRA, but you need to first be aware of it.

Most states have some stated amount, some stated sum that is protected, a certain amount.

And the idea here is that if somebody sues you, that they would be able to take the assets, but they wouldn't be able to take all of the assets.

But there are states that don't protect any money that's in an IRA.

Another thing you should be careful of is you should be careful when working in a plan that is some kind of plan but is not necessarily ERISA qualified.

So the biggest concern here would be something like a solo 401k or some kind of sole investment plan.

And here you need to research the type of plan that you're involved in to see if it is protected from the claims of creditors.

But the basic doctrine, The reason that an ERISA qualified plan is protected is because the legislators who established legislation didn't want those assets to be available lest other people be harmed.

So you see this a lot in asset protection planning.

For example, if you're engaged in these, if you're involved in a single member LLC, you own and practice and operate a single member LLC.

That just simply means you have a limited liability company, but you own the single membership unit.

When a judge is looking at that and trying to decide if that's going to be, if they're going to make the assets of that LLC available to your creditors, if you have a personal creditors that you owe money to, it's fairly easy for the judge to say, listen, we're not about making sure that you can just keep everything once there's a legitimate lawsuit that's been won against you.

We're gonna just take the assets of this single member LLC and we're going to pass them along to your creditors.

Now it's different though if you are part of a multi-member LLC because now the judge is analyzing it they have to look and say well how do we protect the rights of all of the people who are involved.

If you're involved in a solo 401k, or perhaps a SEP IRA, and if you are the only member of that plan, no 1 else would really be hurt if those assets were taken away.

And so if there's a million dollar ruling against you, you owe somebody a million dollars based upon a court order, and they're sitting there looking at your half million dollars in the IRA, sorry, in the solo 401k or the SEP IRA, no 1 else is going to be hurt by that distribution, just you and you owe the debt legally.

So it's a fairly easy path to say, hey, we're going to distribute this asset.

Now there is a difference here between a solo 401k and something like a SEP IRA.

The solo 401k is, of course, has that 401k ruling.

And so the ERISA language requires that I protect this.

The anti-alienation provisions require that these assets be protected.

Well, it does in bankruptcy, but my understanding is it does not protect you from something that's outside of bankruptcy.

Under federal bankruptcy code, your solo 401k is protected, but under something that we're talking about primarily, which is a lawsuit, then you're still a 401k is governed by the laws of your state.

And so some states apply a certain exemption amount, some states don't.

And so here again, I have to refer you to your state.

The danger is that you hold the account yourself and that you're the only beneficiary of the account.

And so you want to be careful to avoid that danger because if possible, if you can just simply make sure that you're not the only person in that account, you'll have additional protection.

So a good rule of thumb is whenever possible, if you're gonna establish some kind of savings plan that's not ERISA qualified in the simple way, such as a 401k, it's best to have multiple participants.

It's always best in your LLCs to have, from asset protection planning, to have multiple members involved.

And it's always best in your retirement accounts to have multiple people covered.

Even something as simple as having you and your spouse covered will go a long way towards having other people involved.

But the very best is if you can additionally have an employee who's covered.

If you can keep those funds together and make sure that multiple people would be hurt, if somebody tried to make distributions, now all the anti-alienation provisions of ERISA can be applied.

Now you build a much stronger structure for yourself.

Be careful with this from a perspective of asset protection planning.

It's not always best to roll money out of your group plan.

It's not always best to roll money out into an IRA.

It's not always best to roll money out into a Roth.

Be thoughtful and careful here and research the laws from an asset protection standpoint.

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608-Asset Protection Planning for Mere Mortals - Part 6 - Retirement Account Exemption Planning