Individual Retirement Accountd are tax shelters that afford significant protection from the payment of income taxes. Your IRA also provides certain legal protections for some types of lawsuits. One lawsuit, however, that may leave you poor at retirement is a personal injury lawsuit. Make sure you understand how to protect yourself and your retirement savings.
The many types of IRAs you may invest in include SIMPLE, SEP, traditional and Roth IRAs. However, you may also invest in educational IRAs. SIMPLE and SEP IRAs are employer-sponsored retirement plans. These IRA plans are normally afforded some protection from creditors in bankruptcy suits, however, these protections may not apply to personal injury suits. Traditional, Roth and education IRAs have bankruptcy protections, but these too may be subject to collection under a personal injury suit.
State laws on creditor protection for IRAs vary. This is because IRAs are not afforded the legal protections as 401k plans are under the Employee Retirement Income Security Act. This means that you may be sued for your retirement savings and have to give up all of your savings as a result of a lawsuit.
To prevent your IRA from being taken away from you, you should carry personal injury protection. Even if your state provides some protection for IRAs, personal injury protection insurance may prevent you from having to go to court since the insurer can settle claims outside of the courtroom and pay the injured party. An amount of insurance equal to your IRA account balance may provide sufficient protection for you.
Consider investing in a 401k plan. These retirement accounts are wholly protected from all creditor judgments under ERISA. A 401k plan is an employer-sponsored retirement plan that offers similar tax benefits as IRA plans. However, 401k plans generally invest in mutual funds only.