Ken Roberts: Protecting retirement plan assets

Ken Roberts
Market Beat

For most Americans, their retirement account represents a significant portion of their net worth.

Qualified retirement accounts like 401(k)s and 403(b)s have some protection from creditors under federal ERISA law. IRAs also have creditor protection, but the amount varies from state to state. If you receive retirement funds as a part of a divorce settlement, they may not have the protection from creditors and could be accessed in the event of a bankruptcy.

Usually, retirement plans aren’t covered by your will. You specify primary and contingent beneficiaries when you set up the account and when you die, the funds go directly to your chosen heirs without having to go through the probate process.

You can provide some additional safeguards for your hard-earned nest egg by placing it in a trust for your beneficiaries that is funded by your IRAs when you die. There are advantages to establishing a trust for your IRAs. Basically, if a trust is established you can get some asset protection for your beneficiaries from creditors and divorcing spouses.

By setting up trusts for the beneficiaries you can also have some control over asset distribution following your death. If you’re worried about a beneficiary overspending, the terms of the trust can control how much they will receive each year. If the beneficiary is a minor, a guardianship will have to be set up for the child until they reach the age of 18, then they are free IRA to spend the funds as they wish. A trust can specify that beneficiaries can only take out the minimum distributions and try to preserve the assets for future generations in the tax-favored account. IRA trusts that require the RMDs, required minimum distributions, to be spread out over the lifetime of each beneficiary are known as “stretch IRAs.”

There are disadvantages as well and one of the most obvious ones is the cost. It can cost thousands of dollars to establish a trust and a professional trustee will charge a fee to manage your trust assets after you pass away. Because of the fees, it might make sense to only consider a trust if you have substantial assets in your retirement account.

If you are thinking about setting up a trust for your retirement accounts, seek out expert legal advice for your situation. Trust laws vary from state to state and are subject to change at any time, just like the federal tax code.

Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.

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