If you lose a personal lawsuit or declare bankruptcy, I know an IRA offers some level of asset protection. If you buy a property in your IRA (i.e. your IRA is on title) and something terrible happens with it such as losing a lawsuit, I assume a creditor could clean the IRA out. Yes? Could they then go after your personal assets to make up a difference?
What if you switched the letters “IRA” with “self-directed 401k” above, is the answer the same? Thank you.
If there is a judgment against you personally, creditors can seize all non-exempt assets to pay the judgment. This includes IRAs (even those unrelated to the lawsuit) unless they are protected by state law as there is no ERISA-equivalent protection for IRAs.
If the property is owned by an IRA, the creditor can liquidate the IRA, regardless of state protections, and go after your personal assets if there is a judgment against you personally.
A 401k is subject to ERISA, which means is assets are immune to creditor seizure. However, that protection does not apply if the 401k is found liable at trial.
Perfect, BLL. Thank you very much!!
Actually, a unanimous Supreme Court ruled that federal bankruptcy law shields individual retirement accounts from creditors. This reversed a lower court ruling from 2003 and now protects IRA’s the same as 401K’s. here is a link to the ruling.
Bankruptcy is a different beast from normal collections, but this case makes involuntary bankruptcy much less useful for leverage. Thanks for sharing.
I have a self-directed IRA investing in Real Estate and was concerned that the LLC could some how be included in any personal actions that may occur against me. The attorney I consulted with felt it was protected but noted that he knew of some cases where creditors attempted to prove a “prohibited transaction” had occured within the IRA in an effort to suspend the retirement account protection. They would still have to unwind the LLC protection, but he brought it up as an example of why it is vital (besides the immediate tax liability concern) to ensure you do not engage in a prohibited transaction in a self directed IRA.