Creditor Protection and Self-Directed IRA and 401(k)s

Protecting your family fortune against market loss is half the battle. If you’ve been blessed with successes, you may also become a tempting target for trial lawyers and their lawsuit-happy clients. Fortunately, Self-Directed IRA and 401(k) investors enjoy some protection for their retirement assets from lawsuits. Here is a survey of some of the basic principles of protecting your wealth against potential lawsuits.

IRAs, including a Self-Directed IRA, also enjoy substantial creditor protection. Federal law also protects substantial balances in IRAs against the claims of creditors, and some states grant additional protection over federal limits. Recent case law, however, indicates that inherited IRAs don’t enjoy the same level of creditor protection. 

  • Maximize use of personal retirement accounts. The self-directed solo 401(k) plan is an excellent vehicle for asset protection for two reasons: Assets held in 401(k)s and other qualified pension plans are not held in your name directly. Rather, the investment company holds these assets in trust on your behalf. They aren’t held in your name, directly. Instead, these assets are held in trust on your behalf. This means that not even the IRS can directly levy account balances in properly structured 401(k)s. Creditors can’t touch it, even with a judgment. The best they can do is get a charging order to divert distributions you take in retirement – which often buys you some time and leverage to negotiate a better deal with creditors.

Inherited 401(k)s are also subject to creditor action. So before filing for personal bankruptcy, consider how much of your retirement assets are inherited and therefore at risk of seizure by creditors.

  • Don’t make a target of yourself. Keep up relatively modest appearances. Don’t name corporations after yourself, or do anything to make it easy for trial lawyers to identify what assets may belong to you from a quick Internet search. The lower your profile, the more difficulty a potential plaintiff will have finding a lawyer to take his or her case on contingency. However, if your community perceives you to be a ‘deep pocket,’ you may attract lawsuits that otherwise would never come to fruition.
  • Make careful use of entities. If your Self-Directed IRA owns multiple properties, for example, consider owning each investment property within a separate LLC or corporation, within your IRA.

Remember: Investment properties can and do generate liability. People get injured on properties, or your tenant’s dog may bite someone generating a claim against your property (and your insurance). If you fail to hold the property within its own LLC or corporation, creditors could not only potentially sue your IRA and seize that property, but could take everything in the IRA. Remember: They can’t come after your (non-inherited) IRA for liabilities you personally cause outside of your IRA. But if it’s your IRA’s assets that generate the liability, your entire IRA could be on the hook. Holding each property within a separate entity may help you contain the damage.

American IRA, LLC is among America’s leading authorities in self-directed retirement accounts. With offices in Charlotte and Asheville, North Carolina, we work with successful self-directed retirement account owners across the country.

For more information on self-directed retirement strategies and techniques, call us today at 866-7500-IRA(472), or visit us online at

We look forward to hearing from you.




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