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Tuesday, December 30, 2008

Rolling Your Retirement Account to an IRA opens the Door for Future Creditors

I worked in the stock market for eight years and there are a surprising number of people who automatically roll over their 401(k) or 403(b) to an Individual Retirement Account (IRA)once they have left their employers. Some do not even know that they can leave their money in their employer-sponsored plan after they leave employment.

Rolling over to an IRA does grant greater convenience in taking out one's hard-earned money, however many do not realize the protection that is lost when assets are rolled over into an IRA. For example, if your money is in a retirement plan which is qualified under the Federal Employee Retirement Income and Security Act (ERISA), then money in your plan is exempt from the claims of most creditors. The reason is that the assets are lumped together and are considered the assets of the sponsoring plan and not the individual. So long as the plan may not be assigned or alienated, the qualified ERISA plan is an excellent vehicle for asset protection. So if you own your own business, are rich, or just think you are going to get sued, then you should try to protect your assets as much as possible and leave your money in your employer's plan.

Conversely, individual accounts such as IRA's, SEP IRA's, some Keoghs and other retirement accounts are easy for creditors to access. It all depends on your state's law, but a good rule of thumb is that if you can get to your money and it isn't exempt by state law, then it will be easy for your creditors to get those same funds.

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