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Are Retirement Assets Subject to Liability Claims?

Because money doesn鈥檛 come with instructions.庐

Article published: June 05, 2025

This Q&A is based on questions we receive from clients, just like you. Have a question that involves a dollar sign? Share it! Our planners and subject matter experts will help answer them in upcoming issues of听Inside Personal Finance.听Send us your questions here.


Q:

I鈥檝e been saving for many years in my 401(k) and other retirement accounts. But I worry that something unpredictable 鈥 like a car accident that leads to a lawsuit 鈥 can put it all at risk. Are my retirement assets fair game if I鈥檓 sued and what can I do to keep them safe?听听

A:

It鈥檚 natural to be concerned about risks like this when it comes to your hard-earned retirement savings. Let鈥檚 take a closer look at some safeguards that are in place for your retirement accounts and measures you can take to add more protection 鈥 and maybe more peace of mind.

Can Retirement Accounts Be Touched in a Lawsuit?

What the law says about asset protection

Let鈥檚 start with some good news: Most retirement plans that you participate in through an employer 鈥 like a 401(k), 403(b), pension or profit-sharing plan 鈥 are covered under ERISA, the Employee Retirement Income Security Act. ERISA plans are generally safe from claims by other people, whether it鈥檚 an injury lawsuit or a creditor suing you. But there are some key exceptions, which we鈥檒l get to in a bit.

Are IRAs protected?

If you have an IRA that was ever ERISA-protected 鈥 for example, a 401(k) that you rolled over into an IRA after leaving a job 鈥 that protection remains with the rollover IRA. When it comes to protection for non-ERISA IRAs, whether they鈥檙e traditional, Roth or inherited accounts, laws vary by state. However, you may be in a situation where your debts exceed your assets. If you declare bankruptcy, your traditional and Roth IRAs are shielded from creditors up to approximately $1.7 million, part of a federal law known as the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.

Common Liability Threats to Retirement Savings

Personal lawsuits and legal judgments

You鈥檙e in a car crash and the other driver sues you, believing you鈥檙e at fault. Someone gets hurt on your backyard trampoline and files a lawsuit. You default on a loan and a court orders you to pay the amount owed. Legal disputes and unexpected accidents happen every day, but with the right protection, they don鈥檛 have to threaten the retirement savings you鈥檙e counting on for tomorrow.

Business liability and professional exposure

As a business owner, you鈥檙e exposed to the same kind of 鈥減remise liability鈥 claims as a homeowner 鈥 like a slip and fall on a wet floor in your shop. But there鈥檚 a wide range of other situations that could lead to lawsuits, including a faulty or defective product that causes injury, negligence or breach of contract that results in damages to a client or even a negative statement made about a competitor online.

Can registering your business as an LLC 鈥 a limited liability company 鈥 protect your personal assets? It depends. Having 鈥淟LC鈥 in your business鈥檚 name isn鈥檛 enough. You have to actually run your business as an LLC, which includes, among other things, keeping business finances (including taxes) separate from your personal finances. Then, if you鈥檙e sued, the plaintiff may be able to collect against the value of your business, but not your personal assets. Keep in mind that an LLC offers the potential for limited liability 鈥 it is not a guarantee.

Tax liens and marital settlements

We mentioned there are a few exceptions to the protection ERISA provides to employer-based retirement plans. One of them is if you owe taxes to the IRS because tax liens supersede all federal and state laws, including ERISA. Federal law also makes an exception for family support or division of property in the event of divorce. And a state court can award all or part of your retirement benefit to a spouse, former spouse, child or other dependent in a marital settlement.

Should You Use Personal Liability Insurance for Extra Protection?

What umbrella insurance can (and can鈥檛) do

Your auto and homeowners insurance policies include liability protection up to an amount you鈥檝e chosen. But what if you鈥檙e sued for an amount that goes beyond that figure? That鈥檚 where an umbrella policy comes in.

An umbrella policy doesn鈥檛 create coverage. Instead, it extends the liability coverage of 鈥渦nderlying鈥 home and auto policies. Any assets that are at risk in a lawsuit 鈥 like some retirement accounts 鈥 could be protected by a combination of the home and auto policy limit plus the umbrella policy limit. For example, say you鈥檙e found to be at fault in a car accident and liable for $1 million in damages for bodily injury. If you had $250,000 of liability coverage on your auto insurance policy plus $1 million in umbrella coverage (the typical policy minimum), the auto policy would pay the first $250,000 of the settlement and the umbrella policy would cover the rest.

So how much umbrella coverage is enough? We suggest obtaining at least as much as your net worth, rounded up to the next million. If you have higher than normal risk 鈥 maybe you have a swimming pool in your backyard or entertain frequently at your home 鈥 you may want to consider additional amounts.

Final Thoughts

Insure adequately and prioritize ERISA plans

Helping protect retirement assets in a lawsuit can come down to a simple strategy: Don鈥檛 underinsure. Your planner can help determine at a high level how much of your assets could potentially be exposed in a lawsuit (for example, if IRA funds are protected from creditors in your state). Our in-house, licensed insurance professionals can review your current insurance and help make sure you have the right amount of liability protection to cover your risk and the value of your assets. We can look at whether umbrella insurance makes sense and help you calculate how much coverage you might need. Sometimes needs change 鈥 for example, maybe you have kids at home who are now driving or will be soon.

You should also consider taking full advantage of the safeguards ERISA provides to workplace retirement plans like 401(k)s. You already have many reasons to prioritize contributions to employer-sponsored plans, like tax benefits and the 鈥渇ree money鈥 of a company match, if available. Protection against lawsuits and creditors is just one more.

Taking proactive steps to secure your retirement assets isn鈥檛 just about smart planning 鈥 it鈥檚 about resting easiing!

WE HOPE YOU鈥橵E FOUND THIS INFORMATION HELPFUL

Remember that any financial guidance must be adapted to your unique circumstances, so consult your financial planner. In the meantime, keep those questions coming!

This material was prepared for educational purposes only. Although the information has been gathered from sources believed to be reliable, we do not guarantee its accuracy or completeness.

Neither 草榴社区 Engines nor its affiliates offer tax or legal advice. Interested parties are strongly encouraged to seek advice from your qualified tax and/or legal professionals to help determine the best options for your particular circumstances.

Neither Financial Engines Advisors L.L.C. nor any of its advisors sell insurance products. 草榴社区 Engines affiliates may receive insurance-related compensation for the referral of insurance opportunities to third parties if individuals elect to purchase insurance through those third parties. You are encouraged to review this information with your insurance agent or broker to determine the best options for your particular circumstances.

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