Are IRAs liable to lawsuits?

If a self employed contractor invests in an IRA for their retirement, would it be considered an asset if some one sued the business?


Just a guess but if the business is incorporated I’d say it’s not an asset.

Isn’t that one reason to incorporate?

And, if it is, do you put down the full amount, or the amount you could withdraw after the early withdrawal penalty?

OTOH, if you were listing assets to take out a loan, I’d certainly mention it. Whether the bank could or couldn’t take is up to them to figure out, but as long as you listed it as an IRA (as opposed to just a savings or investment account), I’d think you’d be in the clear.

A pretty good explanation here.

and here - protection of non-Erisa plans varies by state.

A fairly cheap protection is adding an umbrella policy to your homeowners insurance.

Per the original link, that wouldn’t protect you from a business-related lawsuit: “It is important to note that umbrella policies do not cover business activities”.

The advice to incorporate or whatever would seem to be helpful, as would the nature of the contractor. If you are, say, an IT contractor doing 1099-based work for another firm, and that firm gets sued, I’d be surprised if your assets were at risk. On the other hand if you were doing plumbing work for a homeowner and get sued for that, I suspect it’s another matter.

Certainly you’re better off with assets in an IRA versus a regular bank account, as even in California (per the linked article) you’ve got some protection.

As I understand it, a 401(k) is even better for protection though that may not be an option in the OP’s scenario.

I’m curious about the tax ramifications if an IRA is raided in the case of a lawsuit. Do you get stuck with the IRS penalty?

Joey P. you have to be careful when taking a loan and mentioning the IRA. You do not want that IRA to be considered as collateral for the loan. or it gets treated as a distribution (even if you never touch it).

Not a lawyer, but as I understand it… If you’re self-employed as Bob Smith, then you will be sued as Bob Smith and your IRA is fair game. If you are Bob Smith, LLC, then the company known as Bob Smith is the entity liable for lawsuits and you, Bob Smith the person is not, so your IRA is a personal asset and not a business asset. So the question is, when you are fixing someone’s gutters and you leave a welding torch on burning down their house, was it Bob Smith the individual that did it, or Bob Smith, the representative of the Bob Smith company that did it and that determines who is liable. If there is no company, then it’s just you and your IRA is in trouble.