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I recently encountered a couple who were close to retirement. This couple lost a large civil lawsuit.

My first thought was that the couple would at least be able to keep the money accumulated in their retirement accounts.

I was wrong: this couple never used retirement accounts.

They always felt that using retirement accounts created a barrier between them and their money.

They didn’t think the tax benefits were worth facing a penalty to get their money if they needed it before the account’s age minimum allowed.

That decision exacerbated an already tough situation.

Much of their assets were now subject to forfeiture due to the lawsuit. They are now going to have to squeeze by on Social Security and jobs they will be working well into retirement years.

The principal reason to use retirement accounts is the tax benefits.

Non-Roth accounts offer a tax deduction for contributing and then grow tax-deferred until future use.

Roth accounts don’t provide a tax deduction for the contribution but grow tax-free and can be used tax-free later.

Another lesser-known benefit of using retirement accounts is the ability to protect assets.

How much protection an IRA provides depends on where the money was accumulated.

When an IRA is funded by a rollover from a 401(k) or other ERISA type of retirement plan, there is full creditor protection. The money inside that IRA cannot be touched by creditors.

On the other hand, if the balance of your IRA was only ever in an IRA and you built up the account with contributions over time, the laws are tricky.

There have been court rulings that allow creditors to access some of the IRA in this situation.

How much money a creditor can grab from an IRA is not universal. Courts have been known to modify the amount based on factors like the owner’s age and income needs.

For example, if an IRA owner has a lower income and is past or near an acceptable retirement age, they will be more likely to retain their retirement accounts.

A younger and higher earning IRA owner will be less likely to retain all of his or her assets.

Many experts still agree that assets in a non-ERISA funded IRA are still better protected that holdings in non-retirement accounts.

Remember, this is not universal, and many factors affect this.

California has spun several of their procedures and laws which make things more complicated than other states. Always consult an experienced attorney if you find yourself in such a situation.

If the opportunity to use an IRA has passed, there are other things you can do to protect against liability.

We consistently recommend people buy an umbrella policy.

These policies are relatively cheap and can save a lifetime of savings in the right situation.

Another essential step to protecting assets is to work with a good attorney.

Several attorneys in town are very experienced in sheltering assets from liability. I am often amazed at their knowledge.

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Tom and John Mills are registered investment advisers and certified financial planners. Reach them at 254-0155, MillsWealth.com. Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Strategic Wealth Advisors Group (SWAG), a registered investment adviser.

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