When faced with reduced revenues, increased overhead, and other market forces that put pressure on the cash flow of small businesses, many owners liquidate their personal assets and invest them into their business. They liquidate stock accounts, cash savings, sell other assets in order to raise cash, and even forego a paycheck. It is their passion and their determination that leads them to believe that they will be returned that money and more once they turnaround their business and improve its performance.
The one place many resist going to for a source of capital is retirement accounts. Be that because of high early withdrawal fees, penalties, taxes, spousal pressure, or just because they are resistant in spending money they will need for retirement. That said, what happens when a borrower goes into default on a business loan after they have liquidated all other personal assets? What happens when there is no more money to lend in and the debt must be worked out? Many ask the question, ‘can a creditor take my retirement money or will the bank be prevented from touching them?’
There is some misinformation out there about retirement account protection. Many would lead you to believe that all retirement accounts are protected from collection when in fact that is not true. While there are some federal protections out there for certain retirement accounts such as 401Ks and 403Bs, some other retirement funds such as IRAs and cash value life insurance policies may not carry protection from collection.
Listed below is a breakdown of many of the main retirement investment vehicles and a description of the range of protections available.
ERISA Accounts – These accounts are controlled under the Employee Retirement Income Act and are fully protected across all 50 states, regardless of account size. These types of accounts include 401Ks, 403Bs, and certain types of annuities.
IRAs – Both traditional and ROTH IRAs have a range of protection that varies by state. In certain states such as Texas and Florida, 100% of the account funds are protected from collection. Whereas instates such as California and Maine, the protection is limited to the “extent reasonably necessary to support the household.”
Annuities – There are 18 states that offer no protection for annuities. Many other states have restrictions set on the amount of income from the annuity that are protected, ranging from $250/mo to $2,500/mo. Anything is excess will be available for collection from creditors.
Cash Value Life Insurance – While more likely to be protected than annuities, cash value life insurance policies also vary greatly by state in how much protection is offered from creditors. In states such as Texas, 100% of the cash value is protected; while in states such as Delaware has no protection at all available for cash value life insurance.
You can click HERE for a spreadsheet by state that details a level of protection granted for many personal assets including homestead protection, retirement account protection, and wage garnishment laws. Please confirm with an experienced professional to assure you understand all terms and conditions that are required to receive the protection detailed.
It is crucial if you are business owner facing a loan payment default that you understand your personal exposure, including what protection may or may not be available for retirement accounts. Many business owners find out after it’s too late and are left with little to no retirement money after a workout is complete on a defaulted loan. If you are aware of your full personal exposure during a workout, you can build a plan to honor your creditors position but also retain your personal assets, including retirement accounts. Contact us to request a consultation and learn more about a strategy specifically tailored to your situation.