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Understanding how to protect retirement assets

While many people aren't saving for retirement today, it's something that financial experts across the board recommend. A healthy savings in IRAs or other accounts can make a huge difference in the quality of life of your final years. If you are saving, then you'll probably want to protect those assets for both your own use and for your heirs.

Life isn't predictable, though, so what happens if you later face a serious financial issue? With rising health care costs, many people are declaring bankruptcy simply because they got overwhelmed with medical debt, so it can happen to anyone. Luckily, if you plan ahead and put your money in smart locations, you have some protection against creditors.

Most retirement plans that are sponsored by an employer, such as a 401k, are protected by a federal law known as the Employee Retirement Income Security Act. Unless you are facing collection activity from the IRS or a former spouse, ERISA keeps funds in a 401(k) protected from creditors.

Individual retirement plans aren't covered in the same way, unless you rolled them over from a previous employer-based account. In that case, you might have to prove that's where the funds came from. When it comes to finances and estate planning, documentation is critical.

Even individual accounts, such as IRAs, are afforded some protection if you file bankruptcy. Federal law typically protects up to the first $1 million in such accounts as long as you contributed in the proper manner and aren't using it to hide a sudden influx of cash.

If you pass away and the account is passed to a beneficiary, then a lot of this protection ends. However, you can work with an estate law professional to create a trust to inherit the account to bolster protection against some creditors.

Source: Forbes, "Should you protect your retirement accounts? Absolutely.," Mark Eghrari, Nov. 29, 2016

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