A retirement account is one of the most important assets you will accumulate in your lifetime. Whether you have a 401(k), IRA, or another type of retirement account, it is crucial to protect it from external and internal threats. Protecting your retirement account is crucial to ensure that you have enough funds to sustain your lifestyle after you stop working. In this article, we will discuss how to protect a retirement account and the threats that can affect it from both inside and outside.
FEDERAL AND STATE PROTECTION
The good news is that retirement accounts in the United States are protected by federal law, specifically the Employee Retirement Income Security Act (ERISA) of 1974. ERISA sets minimum standards for most voluntarily established retirement plans in the private industry, including defined benefit and defined contribution plans. These standards include
- reporting and disclosure requirements
- fiduciary responsibilities
- vesting and funding rules
However, not all retirement plans are ERISA-protected. For example, plans such as the 401k plan, Health Savings Account, and defined benefit pension plans are typically subject to ERISA, but other IRAs and are not.
When it comes to state laws, these can vary when it comes to protecting IRAs, and it’s important to note your state-specific laws when it comes to protecting IRA accounts. For example, inherited IRA protection, spousal rights and estate planning can differ. In some states, inherited IRAs are protected from creditors or from being considered part of a person’s taxable estate. In community property states, a spouse may have certain rights to an IRA account that can differ from other states. It’s important to understand the spousal rights in your state when it comes to IRA accounts. State laws can also impact how IRA accounts are treated in estate planning, because some states may have different rules for how IRA accounts can be passed down to beneficiaries.
EXTERNAL THREATS TO YOUR SAVINGS
External threats refer to factors that are outside of your control and can negatively impact your retirement account. These may include market volatility, economic downturns, inflation, and other factors that can cause your account to lose value.
There are some ways you can mitigate these threats. Diversifying your investments is a proven way to protect your retirement account from market volatility. By investing in a mix of assets, such as stocks, bonds, and cash, you can spread your risk and minimize the impact of a market downturn. You should also try to invest in inflation-protected assets. Inflation can erode the value of your retirement account over time. Investing in inflation-protected assets can help protect your purchasing power and safeguard your retirement account from inflation.
INTERNAL THREATS TO YOUR SAVINGS
Internal threats refer to factors that are within your control and can negatively impact your retirement account. These may include early withdrawals, fraudulent activity, and other issues that can jeopardize your retirement savings. Internal threats are often within your control, but they can be equally detrimental to your retirement account. For example, engaging in prohibited transactions, such as lending money to yourself from your retirement account or using your account to invest in your own business, can result in significant tax penalties and compromise the tax-deferred status of your account.
If someone is considered a disqualified person, such as a family member or business partner, they may be prohibited from receiving any benefits from your account. Prohibited transactions can result in severe tax penalties and can jeopardize the tax-deferred status of your retirement account. It is important to understand the rules regarding prohibited transactions and avoid engaging in any activities that could trigger penalties or sanctions.
Regularly monitoring your retirement account can help detect any fraudulent activity or errors. It is important to review your account statements regularly and report any suspicious activity to your financial institution immediately. Internal lawsuits and disqualified persons are additional internal threats that can negatively impact your retirement account, too. For example, if you’re sued, your retirement account could be subject to a lien. Lastly, withdrawing funds from your retirement account before the eligible age can significantly reduce your overall savings and may also incur penalties. It is important to avoid early withdrawals and only use your retirement savings when it is necessary.
SAFEGUARDING YOUR RETIREMENT FUNDS
So, what are some of the threats you should look out for and what can you do to ensure your account is protected? While there are many things you can do to protect your account, here are a few trusted methods to follow to ensure you’re doing all you can to protect your financial stability in retirement.
- Use a Custodian to Review Transactions: Working with a qualified custodian can help ensure that all transactions involving your IRA account are properly reviewed and approved.
- Isolate Safe Assets from Real Estate: Real estate can be a risky investment and is subject to market fluctuations. It’s important to diversify your investments and keep safe assets, such as cash or CDs, separate from real estate investments.
- Use Multiple IRAs: Holding multiple IRAs can help spread risk and protect your assets. For example, you could hold a traditional IRA and a Roth IRA to diversify your tax exposure.
- Have Insurance, Where Applicable: Depending on the type of investments you hold within your IRA account, it may be appropriate to obtain insurance coverage to protect against losses or liabilities.
- Understand The Rules and Get the Right Education: It’s important to understand the rules governing IRAs and to stay informed about changes that could impact your account. Working with a financial advisor and attending educational seminars can help ensure that you have the knowledge needed to protect your IRA account.
Protecting your retirement accounts should be a top priority for anyone planning for their future financial security. With the right knowledge, tools, and resources, you can take proactive steps to protect your retirement accounts from external and internal threats. By working with financial advisors and qualified custodians, diversifying your investments, understanding the rules and regulations governing retirement accounts, and staying informed about the risks and potential threats to your accounts, you can help ensure that you have a stable and secure financial future in retirement. Remember, protecting your retirement accounts is not a one-time event, but an ongoing process that requires regular review and adjustments to align with your changing financial goals and circumstances. Reach out to an IRA Specialist to talk today!