RPF0608-Asset_Protection_Planning_for_Mere_Mortals_-_Part_6_-_Retirement_Account_Exemption_Planning
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00:00:30.680 | 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,
00:00:37.720 | while building your plan for financial freedom in 10 years or less.
00:00:41.960 | Today, we continue our asset protection planning series, wherein I try to equip you,
00:00:46.920 | to arm you with some knowledge of the tools that are available to you to help protect your nest egg, to protect your fortune.
00:00:54.400 | 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,
00:01:01.440 | you also need to be equipped of how to protect those assets.
00:01:05.200 | And so we are working our way through this asset protection planning series.
00:01:08.840 | For context, we are in the middle of talking about exemption planning.
00:01:13.320 | 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.
00:01:20.480 | We've talked a little bit about asset protection broadly, and we're jumping into what I consider to be the most practical
00:01:26.000 | and the lowest hanging fruit in asset protection planning, which is exemption planning.
00:01:31.200 | It's not necessarily the best asset protection planning.
00:01:34.400 | It's not necessarily the most comprehensive.
00:01:37.160 | It may not even be the right place to start, but it is the lowest hanging fruit for the most numbers of people.
00:01:44.520 | So in episode 606, which was part five of the series, we talked about homestead exemption planning.
00:01:50.040 | I explained to you the rules relating the protection of your personal homestead where you live from the claims of your creditors.
00:01:57.920 | And the challenge with homestead planning is it's very state dependent.
00:02:01.600 | There are some states that are wonderful for homestead planning, and there are some states that are horrible for homestead planning.
00:02:06.960 | Here's the good news.
00:02:08.560 | Today's topic, retirement account exemption planning, is going to be the most broadly applicable exemption planning that you can engage in.
00:02:18.800 | And that's because retirement protections, specifically the protections for your retirement accounts from the claims of creditors,
00:02:26.440 | are governed largely by national federal legislation.
00:02:31.040 | Now, there are some important components of state legislation, but they're largely governed by federal, U.S. national federal legislation,
00:02:40.600 | which is applicable in all 50 states.
00:02:43.360 | And if you live in a commonwealth United States or U.S. territory, I don't have a clue if it's applicable to you or not.
00:02:49.400 | But at least this is applicable to people who live in these 50 United States.
00:02:54.840 | I don't wish to bury the lead, so let me just begin with this.
00:02:58.200 | 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.
00:03:11.200 | If you invest through an ERISA qualified plan, a plan that meets all of the requirements of the Employee Retirement Income Security Act,
00:03:20.200 | the funds that you invest in that ERISA qualified plan are protected from the claims of your personal creditors.
00:03:28.600 | They are also protected from the claims of your company's creditors.
00:03:33.320 | And this is because one of the requirements of ERISA is that a pension plan must be structured as a spendthrift trust.
00:03:43.240 | It has to make sure that the assets in the trust cannot be encumbered.
00:03:51.640 | They cannot be given away.
00:03:53.160 | They cannot be taken.
00:03:54.760 | And so those fund assets are protected from creditors.
00:04:00.240 | Now, what types of plans, most normal people, non-financial advisors don't use the term ERISA qualified plan.
00:04:07.480 | Basically a 401k plan or a 403b plan or other qualified plans.
00:04:13.200 | There are other variations of these other pension plans, perhaps a divine benefit plan that is ERISA qualified.
00:04:19.120 | Other pension plans do cover, do cover this, have these same features.
00:04:26.000 | Now, what is not an ERISA qualified plan?
00:04:28.120 | Well, the most common ones would be something like an IRA or a Roth IRA or a SEP IRA or other types of Keogh plans.
00:04:37.960 | So these are the kinds of plans that are not ERISA qualified plans.
00:04:42.320 | So we'll get to that exception in a moment.
00:04:44.360 | But I want to, again, just lead with the most important thing, which is if you invest through an ERISA qualified plan,
00:04:51.080 | the assets in that plan are protected from the claims of your creditors.
00:04:56.800 | This is important.
00:04:58.800 | This is helpful because you can put a lot of assets into a 401k account.
00:05:06.880 | 401k accounts are some of the most useful forms of asset protected accounts for people.
00:05:12.040 | They're very common.
00:05:13.840 | So they're easily accessible.
00:05:15.080 | 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.
00:05:25.120 | You can do that, but that's not exactly common.
00:05:28.720 | Most people don't know that.
00:05:29.880 | So these plans are common.
00:05:32.680 | They're normal.
00:05:34.440 | It's easy to fund an ERISA qualified plan.
00:05:37.320 | It's easy to put money in your 401k.
00:05:38.840 | After all, your 401k administrator holds seminars to try to get you to sign up for it.
00:05:44.120 | You can call your HR manager and they're trying to get you to do it.
00:05:46.920 | 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.
00:05:54.640 | So they can make their own contributions if you're the employee and not a key person, not a highly compensated employee.
00:06:00.120 | They want you to put money into the plan so that they don't have to follow the highly compensated employee rules.
00:06:06.120 | So everybody is begging you to put money in your 401k.
00:06:09.640 | 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.
00:06:17.640 | 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.
00:06:24.640 | So everybody is begging for you to put money into these plans.
00:06:28.640 | 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.
00:06:37.640 | And I'm defining huge in comparison to your income.
00:06:40.640 | 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.
00:06:51.640 | 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.
00:06:59.640 | 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.
00:07:05.640 | But for most people, this represents a very large funding mechanism that they can use fairly easily.
00:07:15.640 | 401k plans generally have good investment options inside of them.
00:07:19.640 | That's very, very useful.
00:07:20.640 | 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.
00:07:27.640 | And so these are really attractive for reasons other than asset protection.
00:07:31.640 | Now add on the fact that the protection of your assets from somebody suing you in an ERISA qualified plan is essentially sacrosanct.
00:07:42.640 | Now we have a very compelling feature.
00:07:46.640 | If you put retirement account exemptions together with the knowledge of Homestead exemptions, you can protect quite a bit of your money.
00:07:57.640 | The most famous case that is always referenced and alluded to to prove this is the case of OJ Simpson, the football player.
00:08:05.640 | Now, if you'll remember, OJ Simpson was, of course, prosecuted in federal court.
00:08:09.640 | He was found not guilty of murder in federal court.
00:08:13.640 | And so he did not face a criminal.
00:08:16.640 | He wasn't locked up as a criminal.
00:08:18.640 | He was found not guilty.
00:08:20.640 | But he was found guilty in a large civil case with those same facts.
00:08:26.640 | And in the case that he was found guilty of a civil case, he lost a very large settlement.
00:08:32.640 | But OJ Simpson had done two things well, according to at least the news reports I've read about it.
00:08:37.640 | Number one, OJ Simpson had purchased land in Florida, a large house in Florida.
00:08:43.640 | And in Florida, with an unlimited Homestead exemption protection, exemption for your house, that house was protected from the claims of his creditors.
00:08:52.640 | Even though he lost the case, his Florida house was still protected.
00:08:56.640 | The number two thing that OJ Simpson had done well is he was the beneficiary of a pension plan.
00:09:02.640 | His NFL pension provided him with an income.
00:09:06.640 | And under these rules that we're talking about today, pension income for an appropriately qualified plan is exempt from the claims of creditors.
00:09:15.640 | So even though he may have lost other assets, he still had a very sizable pension income and a very nice place to live.
00:09:23.640 | That's a good example of how asset protection planning can protect you when facing somebody who wants to take all of your money.
00:09:33.640 | If he had owned a house in another state or if that pension plan had simply been all sitting in bank accounts,
00:09:39.640 | OJ Simpson would be working today instead of, I think he's in jail right now for something else.
00:09:43.640 | He would be working, trying to provide his income somewhere else.
00:09:46.640 | Now, can you imagine for a moment trying to get a job if your name is OJ Simpson?
00:09:51.640 | 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?
00:10:03.640 | The first obvious thing you would do is change your name.
00:10:06.640 | And even though there would be some record of that created that was always accessible,
00:10:09.640 | at least you could work under a legally assumed name and try to get some work that way.
00:10:15.640 | You would obviously try to start businesses that didn't involve your name.
00:10:18.640 | I mean, there are ways that you can solve those problems.
00:10:20.640 | But this is what people face when your name has been plastered over, in his case, every possible media source.
00:10:27.640 | It changes your life. Now, can you imagine the same?
00:10:30.640 | Look, think about the same thing for your situation.
00:10:32.640 | 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.
00:10:41.640 | 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.
00:10:49.640 | Think about how difficult it can be to get a fresh start and just do the things that most people think are normal in that circumstance.
00:10:57.640 | That's a good example of why we do asset protection planning.
00:11:01.640 | So retirement accounts are your first line of defense in terms of exemption planning here.
00:11:08.640 | Because of these benefits of retirement accounts, many people should give them more attention than they do.
00:11:16.640 | Now, there are risks to retirement accounts, which I'll cover in just a moment.
00:11:20.640 | But because of this aspect, many people should prioritize investing into their 401(k) account.
00:11:29.640 | Let me touch on a question that we continually wrestle with here on the show.
00:11:33.640 | That question involves paying off debts versus investing.
00:11:37.640 | I've used this first when talked about homestead exemptions.
00:11:40.640 | But let's say that you live in a state that doesn't offer any meaningful homestead exemption amounts.
00:11:48.640 | You don't have an unlimited protection. You have a $20,000 homestead exemption protection.
00:11:55.640 | 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.
00:12:05.640 | Well, every dollar that you pay against your home mortgage in your state is a dollar that can potentially be taken by your creditors.
00:12:15.640 | Every dollar that you put into a bank account is potentially a dollar that can be taken by your creditors.
00:12:25.640 | Whereas every dollar that you put into your 401(k) is a dollar that's protected from the majority of your potential creditors.
00:12:34.640 | And in terms of lawsuit risk, all of your creditors.
00:12:38.640 | So now this has to tilt things in a different direction for you.
00:12:43.640 | You should now place a higher priority on making those 401(k) dollar contributions and a lower priority on paying off the mortgage or paying off a certain line of credit.
00:12:53.640 | So you have to factor this into your individual situations.
00:12:56.640 | Now, are 401(k) dollars absolutely bulletproof? Are they protected from all creditors? No.
00:13:05.640 | 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.
00:13:13.640 | Or I think one of the ones I even forgot to go over in that show, one of the worst is the value of the money if you live in a homeowners association,
00:13:21.640 | the value of your asset inside that homeowners association is not protected from the claims of even the homeowners association.
00:13:27.640 | Here in Florida, when I was a young man, I helped somebody who was being threatened with foreclosure on their condo by their condo association because they were in arrears on their condo fees.
00:13:38.640 | And I called up and this is just this long before I was a financial advisor.
00:13:42.640 | I just called him up as a friend and I spoke to the lawyer and the lawyer informed me something that was quite shocking to me that the condo association had the right to foreclose basically at any time once their fees were unpaid.
00:13:54.640 | And I couldn't believe it. I could not believe it how the local condo association had so much power.
00:14:01.640 | I 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.
00:14:09.640 | Because you now give a local, usually often poorly run organization claims over what can be a very significant asset for you.
00:14:20.640 | 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.
00:14:30.640 | 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.
00:14:41.640 | So what are the risks for asset protection in a 401k plan in an ERISA qualified plan?
00:14:49.640 | Well, the first biggest one is the IRS. ERISA plans are not protected from claims by the IRS.
00:14:58.640 | If the IRS claims that you owe them money, they have the legal right to take the money in your ERISA qualified plan.
00:15:07.640 | That's a major problem. It's a major problem for many people.
00:15:12.640 | 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.
00:15:19.640 | Or if you're in a contentious situation with the IRS, don't think that the money in your 401k plan is protected.
00:15:27.640 | It is not protected from federal tax claims.
00:15:32.640 | The next important area where it's not protected is from federal criminal fines and restitution orders.
00:15:40.640 | If OJ Simpson had been found criminally liable, criminally guilty, excuse me, let me use the right language, criminally guilty in the most famous case,
00:15:52.640 | if he had been found criminally guilty and if the judge had ordered him to pay a fine in addition to jail time,
00:16:01.640 | then in that case, his NFL pension would have been invaded to satisfy that fine.
00:16:10.640 | So criminal fines or criminal restitution orders are not protected.
00:16:18.640 | Your 401k is not protected from it.
00:16:21.640 | Another major one is family issues.
00:16:25.640 | Your 401k or ERISA qualified plan is not protected from child support payments, alimony payments, and it's not protected from divorce claims.
00:16:38.640 | Just about anybody who's gone through divorce court or who has known anybody who's gone through divorce court understands that this is the case where that asset is not protected.
00:16:47.640 | Now, even if the 401k plan is not immediately distributed, it's very common that it's not.
00:16:55.640 | 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.
00:17:03.640 | 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,
00:17:12.640 | which legally entitles her to 50% or whatever the appropriate number is of my 401k plan.
00:17:18.640 | She's legally protected there, but the money is just not distributed immediately in that scenario.
00:17:23.640 | So divorce, child support, alimony, those are the major situations where the 401k plan is not protected.
00:17:32.640 | 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,
00:17:44.640 | 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.
00:17:55.640 | 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.
00:18:06.640 | Example, a Roth IRA. A Roth IRA is not protected by ERISA legislation.
00:18:14.640 | A traditional IRA is not protected by ERISA legislation.
00:18:18.640 | Now this becomes a major problem because one of the standard tropes of financial advice, which I'm ashamed to say I have also been guilty of giving, is simply this.
00:18:28.640 | You know, if you're not, the way I used to say it before I knew better, was I used to say, "If you're not at your old job, your 401k shouldn't be there either."
00:18:35.640 | Right? Sounds cute. "If you're not at your old job, your 401k shouldn't be there either."
00:18:40.640 | Now there are some really compelling reasons to consider rolling out money from a 401k plan when you leave a job into an IRA.
00:18:48.640 | You may have a much broader range of investment options.
00:18:51.640 | Your 401k menu of investment options may feature maybe 30 or 40 different mutual funds that you can invest in, but nothing beyond that.
00:19:00.640 | Whereas an IRA could conceivably be invested in almost anything.
00:19:06.640 | Obviously you need to avoid the specifically prohibited transactions.
00:19:10.640 | You can't invest your IRA in a life insurance contract, for example.
00:19:13.640 | But if you had a self-directed IRA, you could invest in a broad range of things.
00:19:18.640 | But more commonly, you can invest in any mutual fund company.
00:19:22.640 | You can invest in any stock if you roll it over to an IRA.
00:19:25.640 | You can also gain benefits like lowering your expenses.
00:19:28.640 | If you were to roll 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.
00:19:39.640 | And over a period of years and decades, that can be very compelling in terms of the amount of money that it saves you.
00:19:44.640 | Many 401k plans, 403b plans are very poorly run, have very poor investment options, and are very expensive for you.
00:19:52.640 | But you give up that asset protection.
00:19:58.640 | That's a real problem. Or it can be a real problem.
00:20:02.640 | Now here you need to research your specific state.
00:20:05.640 | Talk to an asset protection attorney or perhaps a bankruptcy attorney in your state and understand the rules of your states.
00:20:12.640 | Some states are quite generous.
00:20:14.640 | 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.
00:20:33.640 | It's one of the reasons why I like the state of Florida.
00:20:36.640 | I have a whole long list of laundry list of things that I don't particularly like that the Florida government does.
00:20:42.640 | But at least they're serious about protecting people from the claims of creditors.
00:20:47.640 | At least they're serious about not passing income taxes.
00:20:49.640 | 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.
00:20:58.640 | 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 some trouble with that.
00:21:11.640 | That would cause me to have to rework my asset protection plans.
00:21:15.640 | So you will have to research your particular state because your state will determine whether or not your IRA is protected.
00:21:24.640 | And depending on the details of your situation, you should pay careful attention to that.
00:21:29.640 | 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.
00:21:36.640 | Most states have some stated amount, some stated sum that is protected, a certain amount.
00:21:44.640 | 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.
00:21:52.640 | But there are states that don't protect any money that's in an IRA.
00:21:57.640 | So be careful of that.
00:22:00.640 | 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 a RISA qualified.
00:22:11.640 | So the biggest concern here would be something like a solo 401k or some kind of sole investment plan.
00:22:19.640 | 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.
00:22:25.640 | Once again, your state will matter here.
00:22:27.640 | Your state will make the difference.
00:22:29.640 | But the basic doctrine, the reason that an RISA qualified plan is protected is because the legislators who established legislation didn't want those assets to be available, lest other people be harmed.
00:22:47.640 | So you see this a lot in asset protection planning.
00:22:51.640 | For example, if you're involved in a single member LLC, you own and practice and operate a single member LLC.
00:23:00.640 | That just simply means you have a limited liability company, but you own the single membership unit.
00:23:05.640 | Thus, you own the whole thing.
00:23:07.640 | Well, when a judge is looking at that and trying to decide 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.
00:23:29.640 | We're going to just take the assets of this single member LLC, and we're going to pass them along to your creditors."
00:23:34.640 | Now, it's different, though, if you are part of a multi-member LLC, because now the judge is analyzing it.
00:23:41.640 | They have to look and say, "Well, how do we protect the rights of all of the people who are involved?"
00:23:46.640 | Now, the same thing applies to your 401(k).
00:23:50.640 | If you're involved in a solo 401(k) or perhaps a SEP IRA, and if you are the only member of that plan, no one else would really be hurt if those assets were taken away.
00:24:04.640 | 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 SOLO 401(k) or the SEP IRA, no one else is going to be hurt by that distribution, just you, and you owe the debt legally.
00:24:23.640 | So it's a fairly easy path to say, "Hey, we're going to distribute this asset."
00:24:28.640 | Now, there is a difference here between a SOLO 401(k) and something like a SEP IRA.
00:24:33.640 | The SOLO 401(k) of course has that 401(k) ruling, and so you say, "Well, this is a 401(k), and so the ERISA language requires that I protect this.
00:24:45.640 | The anti-alienation provisions require that these assets be protected, so this should qualify."
00:24:51.640 | Well, it does in bankruptcy, but my understanding is it does not protect you from something that's outside of bankruptcy.
00:24:57.640 | Under federal bankruptcy code, your SOLO 401(k) is protected, but under something that we're talking about primarily, which is a lawsuit, then your SOLO 401(k) is governed by the laws of your state.
00:25:07.640 | Some states apply a certain exemption amount, some states don't.
00:25:11.640 | And so here again, I have to refer you to your state.
00:25:14.640 | The danger is that you hold the account yourself and that you're the only beneficiary of the account.
00:25:20.640 | That is the danger.
00:25:22.640 | 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.
00:25:32.640 | So a good rule of thumb is whenever possible, if you're going to establish some kind of savings plan that's not ERISA qualified in the simple way, such as a 401(k), it's best to have multiple participants.
00:25:44.640 | 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.
00:25:55.640 | Even something as simple as having you and your spouse covered will go a long way towards having other people involved.
00:26:02.640 | But the very best is if you can additionally have an employee who's covered.
00:26:06.640 | If you can keep those funds together and make sure that multiple people would be hurt if somebody tried to make distributions, now the anti-alienation provisions of ERISA can be applied.
00:26:15.640 | Now you build a much stronger structure for yourself.
00:26:18.640 | So be careful.
00:26:20.640 | Be careful with this from a perspective of asset protection planning.
00:26:23.640 | It's not always best to roll money out of your group plan.
00:26:26.640 | It's not always best to roll money out into an IRA.
00:26:31.640 | It's not always best to roll money out into a Roth.
00:26:33.640 | Be thoughtful and careful here and research the laws from an asset protection standpoint.
00:26:39.640 | With most things legal, most things financial planning, if you read the rules, you'll find just a couple simple things that you need to do.
00:26:45.640 | And it could be a big, big deal, especially if you have a sizable plan balance.
00:26:50.640 | Make sure you always have one non-related employee who's part of the plan.
00:26:54.640 | That way you can keep that asset protection plan in force.
00:26:59.640 | Now, let me give you some ideas for how you can protect your IRAs, protect your Roth IRAs, so that in case you're in a difficult situation, because the protection of money that's in a 401(k) or appropriately ERISA qualified plan is fairly straightforward, there's really not much I need to tell you other than participate, fund it, and make sure that it stays there.
00:27:21.640 | There's not much I need to tell you.
00:27:23.640 | Most of the interesting things that you should consider would involve an IRA, a traditional IRA or a Roth IRA, your individual retirement account, because that's the account that's probably, for most listeners who are not in a state that has good protection, that's the account that is most important to you.
00:27:44.640 | Additionally, that is the account that is most likely to be important to you for a very long period of time.
00:27:49.640 | The normal process of retirement planning would involve your accumulating assets inside of your employer's 401(k) plan, and then at your retirement, the normal process would be your distributing those assets into an IRA, and then using the income from the IRA to protect yourself.
00:28:08.640 | So what do you do?
00:28:09.640 | Well, to reiterate, be careful.
00:28:12.640 | Before you just automatically roll money out of your employer plan into an IRA, be careful.
00:28:19.640 | Think about it carefully.
00:28:20.640 | You could have a problem.
00:28:22.640 | Now, the biggest problem here is going to be your financial advisor.
00:28:28.640 | This is one of the problems where the purchasing of financial advice is difficult.
00:28:33.640 | Most financial advisors will be paid a fee based upon their management of assets, and that management of assets means you roll your money from where it is right now over to your financial advisor's company.
00:28:49.640 | That's the normal relationship here.
00:28:51.640 | And so because of this, financial advisors are very aggressive about bringing assets over under their management.
00:28:59.640 | They're very, very aggressive because that's the only way that they'll get paid.
00:29:03.640 | And so it would be a very rare financial advisor, first of all, who would even understand what I'm talking to you about now, but it would be a very rare financial advisor who would advise you to leave the money at your employer plan because they're going to make a substantial amount of fees.
00:29:20.640 | The number one biggest target of financial advisors who want to build the assets that are under their management is to find people with large retirement account balances at previous companies because they can roll that money over and they can make substantial fees on it.
00:29:37.640 | Now, is that a bad thing?
00:29:38.640 | I don't think so.
00:29:39.640 | I used to do it.
00:29:40.640 | But I think you need to be careful, and your financial advisor should hopefully share with you some information, but they're probably not going to.
00:29:47.640 | So you need to be careful, and you need to understand that there's a good chance that you should still have that money at your employer's account.
00:29:57.640 | And if you do that, then you have a problem.
00:29:59.640 | How do you get financial advice on the money?
00:30:01.640 | So you may need to pay some additional fees, or you may need to pay some direct fees.
00:30:05.640 | And this is where it can be very helpful for you to pay a financial advisor fees directly so that they will give you advice on the money, so they'll give you a service on the money, but still keep it at your employer's 401(k) plan.
00:30:17.640 | So just be careful with any kind of rollover like that.
00:30:21.640 | Now, if you have rolled your money out of a qualified plan into an IRA, research whether or not you can roll it back into a qualified plan.
00:30:31.640 | And this may be, although I don't know the answer, I've not researched this, but this may be one of those strategies that you can use if you are actually facing a claim.
00:30:41.640 | In a previous episode of the show in this series, I talked to you about how the best time to do things is before the facts that lead to a claim even happen.
00:30:51.640 | But there are strategies that you can pursue that if you are actually facing a creditor claim, there are strategies that you can pursue that would protect assets from that creditor if there's a problem.
00:31:03.640 | And I don't know the answer because I didn't research it prior to this question being raised just in the last few minutes, but this may be one of those things that could pass that test.
00:31:11.640 | You've previously rolled money out of a 401(k) into an IRA, but now something has happened.
00:31:17.640 | You've gotten wind of a lawsuit.
00:31:18.640 | Perhaps if you do roll it over and back into the 401(k) now, it would be protected.
00:31:22.640 | I don't know.
00:31:23.640 | Maybe an intelligent listener can research that and let me know or I may do it myself.
00:31:28.640 | So remember, you can sometimes roll it back in.
00:31:31.640 | Remember, of course, that sometimes you can just simply take money out of an IRA.
00:31:35.640 | You can always liquidate an IRA and then move it into another exempt asset.
00:31:40.640 | I go back to this.
00:31:42.640 | Hey, if I had a million dollars in an IRA and I knew that IRA were exposed to creditors, I'm facing a claim, I'd take the distribution from the IRA and I'd buy a house in Florida.
00:31:52.640 | Now, it gets one better.
00:31:54.640 | I just moved to Florida because Florida law protects very clearly, the legislature in Florida protects all of your IRA claims from the claims your creditors with the same protection level as the federal ERISA statutes do.
00:32:08.640 | So in this case, you can just simply move to Florida.
00:32:11.640 | This is where I hate that that's a recurring theme, but it really does make a-- it really is true.
00:32:16.640 | If you're in a bad situation and you're facing a problem, you want to protect and move your assets into exempt assets, and one of those ways can be to move.
00:32:25.640 | But if you don't want to move to Florida, perhaps you can simply roll the assets out and then purchase another asset that is going to be protected in your estate.
00:32:36.640 | Remember that there are various investments that you can purchase inside of your IRA.
00:32:43.640 | So a simple example would be something like an annuity.
00:32:47.640 | Many states may not protect your IRA assets, but they will protect and provide an unlimited exemption amount for an annuity.
00:32:56.640 | And so ordinarily, you need to analyze carefully before you buy an annuity inside of an IRA.
00:33:03.640 | An annuity doesn't get you any additional tax benefits when put inside of an IRA.
00:33:09.640 | It's not like the annuity which defers tax is getting you anything better than the IRA.
00:33:14.640 | But in this case, maybe you can purchase an annuity, and if you purchase an annuity, then now that annuity contract protects those assets inside of the IRA.
00:33:23.640 | And by doing so, you can invest the asset in a way that there's no tax consequences.
00:33:28.640 | You just take the, let's say you take the money that's inside your IRA, you take it out of whatever mutual fund it's invested in right now, and then you purchase an annuity contract.
00:33:37.640 | You can do that with most custodians that you have very, very simply and easily.
00:33:41.640 | There's no tax considerations, but now you have that annuity wrapper around your money, and that's now protected if your state protects and exempts annuity contracts.
00:33:50.640 | Remember, of course, you can never buy a life insurance contract inside of an IRA, but you can buy an annuity contract.
00:33:57.640 | Or perhaps you can consider moving into something like buying, buying, setting up, doing a self-directed IRA using an offshore LLC.
00:34:07.640 | This is very interesting because if you can take your IRA assets and then purchase an offshore LLC, now you have the protection of that offshore LLC.
00:34:16.640 | Somebody who is an offshore manager is not going to be subject to the U.S. court order.
00:34:22.640 | And if you write your LLC properly, try to make sure it's a multi-member LLC, put in charging order protection.
00:34:30.640 | It'll have charging order protection. That's the only remedy.
00:34:33.640 | But you can put a protector in that LLC. Make sure that that LLC is protected.
00:34:38.640 | And now, even though your U.S. creditor has a claim against your IRA, your manager of your offshore LLC is not going to pay them.
00:34:48.640 | They are not subject to that U.S. court jurisdiction.
00:34:53.640 | This is an idea that I find extremely interesting because there are additional benefits of even of personal privacy.
00:34:59.640 | In the wake of the 2010, when the United States passed the FATCA legislation, the Foreign Accounting Tax Compliance Act, FATCA,
00:35:09.640 | which basically mandates that banks all around the world that you personally have to disclose all of your offshore bank accounts,
00:35:16.640 | all of your offshore assets, with a couple of exceptions, which we'll talk about at a different time.
00:35:22.640 | One of the only workarounds that I have found to maintain privacy in that situation is an offshore LLC,
00:35:30.640 | excuse me, an offshore IRA. An offshore IRA can own an offshore LLC.
00:35:33.640 | That offshore LLC can invest in whatever it wants. And that offshore IRA is not subject to FATCA legislation.
00:35:39.640 | So it's kind of an interesting way to bring together some personal privacy benefits with some very strong asset protection benefits.
00:35:48.640 | Now, there are about a bazillion rules that you need to follow when setting up a self-directed IRA.
00:35:53.640 | And you have to, of course, follow all those rules, make sure there's no prohibited transactions, et cetera.
00:35:57.640 | But this is very doable. You can establish an offshore LLC, have a self-directed IRA that owns that offshore LLC,
00:36:05.640 | and now you bring significant asset protection planning to your personal IRA.
00:36:10.640 | And this is the type of strategy that is extremely important for wealthy retirees.
00:36:15.640 | Again, if somebody is simply working and contributing and putting money into their employer plan, that'll work great all through that accumulation period.
00:36:23.640 | But most of the time when you reach that distribution period, you want something that's a little different.
00:36:29.640 | And you wouldn't want to just keep your money at your 401(k) with that same thing, those same 32 funds.
00:36:36.640 | That doesn't provide all of the options you might like to have during the distribution stage.
00:36:41.640 | And so if you start to put a couple of these things together, then you can get good asset protection planning, access to a broader range of investments.
00:36:48.640 | You can get all the benefits of offshore investing, potentially higher returns, potentially more interesting investment, products that are not permitted in the United States.
00:36:57.640 | So anyway, consider that and research that very seriously.
00:37:01.640 | And then finally, one more strategy is always be careful.
00:37:05.640 | If you, again, live in a state where your IRA is not protected, you might consider moving that IRA back in under federal law by declaring bankruptcy.
00:37:17.640 | So let's pretend, say for example, that you have a million bucks in your IRA.
00:37:25.640 | Federal Bankruptcy Court exempts claim, sorry, exempts your IRA assets up to a little over a million dollars in bankruptcy.
00:37:33.640 | If you have a $10 million IRA, it won't work.
00:37:35.640 | But let's say you have a million dollars in your IRA and somebody wins a lawsuit against you for a couple hundred thousand dollars, $200,000.
00:37:44.640 | Well, now in this situation, if your state does not protect it, then of course that creditor is going to come after that million dollar IRA because that can fully satisfy their $200,000 claim.
00:37:54.640 | But if you declare bankruptcy and if that IRA represents the majority of your assets, you may forfeit other assets and you can possibly escape that claim, but you can still protect the million dollars that is in your IRA.
00:38:07.640 | That's why bankruptcy planning and asset protection planning always have to go together.
00:38:10.640 | You need to understand the federal bankruptcy law, do a bankruptcy planning analysis, what would happen if I declared bankruptcy so that you could protect those assets.
00:38:21.640 | One other thing that you should research if you are, especially if you're in an antagonistic situation, some retirement plans will accept additional contributions.
00:38:33.640 | Now, of course, these are going to be made on an after-tax basis, but some retirement plans can be structured to accept additional contributions.
00:38:40.640 | What's the benefit of that?
00:38:41.640 | Well, although you're not getting the same tax benefits on your contributions, for example, you're not getting a tax deduction up front.
00:38:49.640 | What you can do if you're making additional after-tax contributions is you can move money from an unprotected status into a protected account.
00:38:58.640 | That can be very helpful because wouldn't you like it if the money that was in your bank accounts were actually invested and protected in an investment instead of just being in a non-retirement account where you're paying taxes all the time?
00:39:12.640 | Wouldn't it be nice if it were inside a retirement account where it additionally had creditor protection?
00:39:16.640 | Well, you can do that sometimes if you invest additional after-tax dollars into your retirement plan.
00:39:23.640 | Now, be careful here because some states don't protect those excess funds if that's done right before bankruptcy or right before creditors coming after you.
00:39:32.640 | But that would be a strategy that you should put on your checklist to explore with an attorney who knows the laws in your state.
00:39:40.640 | Remember also that retirement plans are not the only way of protecting some of your money and some of your income or of getting the same benefits.
00:39:48.640 | For example, you may have access to and be able to participate in a deferred compensation plan.
00:39:54.640 | Well, a deferred compensation plan is generally going to be creditor-proof, at least from your own personal creditors, not from the company's creditors.
00:40:02.640 | One of the challenges with deferred compensation plans is those assets have to be available to the claims of a company unless they're held in a rabbi trust.
00:40:11.640 | But the point is if you participate in a deferred compensation plan, you can additionally accumulate money that will be payable to you in the future while protecting your current money and your current assets from the claims of creditors.
00:40:24.640 | So don't ignore those types of opportunities if they're available to you.
00:40:27.640 | Deferred comp plans used to be available in certain sectors of the economy, but they're less common.
00:40:33.640 | So I don't want to go too deep into that.
00:40:35.640 | Finally here, be careful when it comes to inherited IRAs and IRA distributions.
00:40:44.640 | One of the biggest things that you would like to do with asset protection planning is you would like to not only protect your own assets while they're under your control,
00:40:51.640 | but you would like to protect those assets and make sure that they're protected from the claims of other people for the people that you want them to go to.
00:40:57.640 | So if you die and you leave assets to your kids or to your grandchildren, then all of a sudden their creditors come after the assets.
00:41:06.640 | Now we've got a problem because now we didn't do the best thing.
00:41:10.640 | If you're in this situation, you should be careful with your beneficiary designations.
00:41:15.640 | One of the great benefits of IRA plans is that when you leave them to your beneficiaries, they can take those distributions out on a very stretched out basis,
00:41:28.640 | which allows them to defer the tax liability to allow the money to continue to grow tax deferred or tax free and only take it out over a very long period of time.
00:41:37.640 | That's usually the benefit of leaving your IRAs to an individual.
00:41:41.640 | The trouble is when you leave the IRA to an individual, they lose their asset protection perspectives.
00:41:48.640 | Of course, they can invade it themselves.
00:41:50.640 | It becomes an immediately inherited asset.
00:41:53.640 | A few years ago, there was a court case which held that inherited IRAs do not have the same protection as regular IRAs do.
00:42:03.640 | So now we have a problem.
00:42:05.640 | How do we leave the asset in a way that we can maintain those tax benefits but also have some kinds of asset protection planning standpoint?
00:42:16.640 | In the past also, if you just simply left it into a trust, then you couldn't use the stretch out beneficiary designations.
00:42:23.640 | What I'm starting to see attorneys work on is trusts that are specifically designed to be the beneficiaries of an IRA, where they're specifically designed to be listed as the beneficiary of the IRA,
00:42:37.640 | and to maintain both the asset protection perspective of having a spent thrift trust, where the trust assets are not available to your child or to your grandchildren's creditors.
00:42:46.640 | They're protected in case of divorce, protected in case of bankruptcy, etc.
00:42:50.640 | But they still have the stretch out provisions to be able to stretch out the tax liability.
00:42:54.640 | So that's worth your investigating as part of your estate planning.
00:43:00.640 | That's enough.
00:43:01.640 | I wanted today's show to be half this time, but you get into this stuff and it's rather fun and rather complicated.
00:43:08.640 | In short, in closing, I would simply say that between the homestead exemption and retirement account exemption, many people, most people, most normal people, not the very wealthy, not the very high-income,
00:43:22.640 | but most normal people can protect most of the assets that they really need to protect.
00:43:27.640 | Now, we're going to add on just a couple more exemptions.
00:43:31.640 | We're going to talk about life insurance, and when you add life insurance, cash value life insurance, which protects the inside buildup of those funds,
00:43:38.640 | when you add life insurance exemptions on to homestead exemptions and retirement account exemptions, you have something really, really strong.
00:43:46.640 | And then we'll talk briefly about personal property exemptions.
00:43:49.640 | If you understand the personal property exemptions, you have really low cost, really strong asset protection here.
00:43:56.640 | So far, and what I've said, you don't have to contact a lawyer. You can research the stuff yourself.
00:44:01.640 | DuckDuckGo is your friend.
00:44:03.640 | Just do a web search and work around until you figure out the details for your estate.
00:44:07.640 | And just by simply choosing to place your money into one account versus another, you can put in place very strong asset protection planning.
00:44:14.640 | The great thing is when you're standing in front of a judge and you are going over all of the assets that you've listed on your judgment debtor statement,
00:44:24.640 | and you're going over all those assets, every single thing we've talked about is financially sound, is normal, and it's not even the least bit exotic.
00:44:34.640 | I mean, the most exotic we got today was to talk about an offshore LLC with a self-directed IRA.
00:44:39.640 | That's a little exotic.
00:44:41.640 | But everything else we've talked about is not the least bit exotic.
00:44:44.640 | So this was a really good, strong place to start.
00:44:47.640 | I hope this has been useful to you.
00:44:49.640 | In closing, I simply want to remind you about my credit card course, RadicalPersonalFinance.com/CreditCardCourse,
00:44:54.640 | if you'd like to learn how to borrow money safely and never pay interest using credit cards.
00:44:58.640 | If you have a credit card or you think you'll ever have a credit card, this is the course for you.
00:45:03.640 | It is vital that you understand how they work so that they can be a tool for you in the future.
00:45:08.640 | They're probably one of your most valuable borrowing tools and can be some of the safest borrowing tools if you understand the details.
00:45:15.640 | Go to RadicalPersonalFinance.com/CreditCardCourse and sign up today.
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