401k Creditor Protection vs. IRAs

Submitted by John Lee on Tue, 2022-11-08 21:32

Apologies if this has been covered many times, but “Search” doesn’t seem to provide any links to the topic.

I’ve often heard that 401k plans offer greater protection than IRAs. Can anyone point me to conclusive resources that lay this out? And, to the extent that it’s state-specific, most of my clients are in California.

Thanks!



Submitted by Alan - IRA critic on Tue, 2022-11-08 22:46

  • 401k plans benefit from protection under the ERISA anti-alienation protection, but that does not include spousal settlements or IRS liens. IRA creditor protection is state specific, with many states offering full creditor protection that approaches that of ERISA. However, IRA plans in CA are subject to a confusing combination of rules.
  • Basically, CA only protects IRA accounts to the extent needed to provide the IRA owner and spouse with basic support. This is a subjective amount, and the consensus is that it may provide no more than 100k of creditor protection on average.  However, in 2007 in McMullen v Haycock, the Ca Court of Appeals ruled that rollovers from employer plans (eg 401k)  were to receive full creditor protection, but not other IRAs. Therefore, a CA resident should not commingle contributary IRAs with rollover IRA balances, which would create a combined account that either lost protection entirely or only received partial protection. Since this is all based on a court decision, such protection could be ended with a subsequent court decision and is therefore not as Secure as ERISA protection or IRA protection in other states provided by the respective state statutes. 
  • This is a very general summary, and subject to other subjective factors on a case by case basis.

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