Can I Be Sued for My IRA?
If you're sued and lose, can they take your IRA?
That was the question a reader posed on one of my older posts. Here's the question from J. Brown:
“The majority of my assets are in retirement accounts (IRA's, specifically). I used to have an umbrella policy, but was told that if I were sued, the money in my IRA could not be looked at to satisfy any judgment. Is this true? Where can I go to find additional info on this?”
What's An Umbrella Policy?
Before I get to the answer, let me quickly review what an umbrella policy is. An umbrella policy is an insurance policy that provides liability protection beyond that offered by other policies. The ‘other policie's are usually homeowners and auto insurance. If you look at your auto policy, you'll see a maximum liability amount. If a judgment is entered against you beyond that amount, you're on the hook for it (assuming you have that level of assets).
That's kind of confusing, so let me use an example. Let's say I have $100/$300 coverage through my auto policy and don't own a house. I have assets of $150,000 and cause a serious accident that results in a lawsuit. I lose and the plaintiff is awarded damages of $140,000. My insurance company pays $100,000 of that award and I'm on the hook for the rest.
Now if I had an umbrella policy, I wouldn't be writing that $40,000 check. For a few hundred bucks a year, an umbrella ups your liability coverage to $500,000 and up. You can get millions of dollars of coverage if you want. But remember you only need an umbrella if you have a lot of assets – enough to warrant the coverage.
So can they get my IRA?
So this brings us to the question. Is your IRA included in your assets? In my example, what if all of my $150,000 in assets is in an IRA. Can it be seized?
The answer, as with everything law, is “it depends.”
It depends on where you live. State law determines whether these assets are included or not. That's not very helpful, so here's a great resource that gives the answer for all 50 states and DC. Look for ‘IRA and Pension Plans.'
I didn't look at all 50 states, but in every case I checked, the answer was, No – IRAs are not counted and cannot be taken in a lawsuit. If you live in California, hire an attorney – I couldn't figure out the answer.
Now let's all hope this never comes up for us.
I'm trying to figure out for a friend. We are placing all her other investments in a Trust, but I cannot figure out how to handle retirement accounts. Since she's in CA, it's very confusing. I've been told that the qualified accounts cannot be placed in the Trust. They must be transferred to a non-qualified account. She is not yet retired, so this would negate any tax benefits for her while she is still working and accumulating.
This is an interesting question, and one that I hadn’t considered before. Since I live in California, I looked up the Code of Civil Procedure statute and what I got out of it was this: Your IRA and other retirement accounts are protected to the extent that you need them to survive during retirement. So as I understand it, if you’re retired and getting, say $1000 per month from retirement accounts but you only need $800 for living expenses, that $200 per month is recoverable. The actual numbers would be determined by the court after it heard evidence on how much is really needed for living expenses. What the statute doesn’t discuss is the protection for someone who’s not yet retired, like me. I would have to research the case law to see how they do the calculations for someone who’s got 25 to 30 years til retirement, but that’s for another day.