Question: Are my 401(k) and IRA assets safe from creditors if I declare bankruptcy? Similarly, are they safe from judgment creditors if a judgment in a lawsuit is obtained against me?

TB: The federal Employee Retirement Income Security Act (ERISA) protects 401(k) assets from creditors but doesn't stop creditors and others who wish to file a claim against you from attempting to pierce the protective veil that has been placed around these assets. There have been some instances when creditors have attempted to attach these assets but I'm not aware of any cases of 401(k) assets being successfully attached; however, there have been some successful IRA cases.

This is because state laws govern IRA assets and some of these laws aren't as strict as ERISA. In recent years, state legislatures have started to realize that IRAs need stronger protections and laws have been tightening.

There was a move afoot in Congress earlier this year to make it easier for creditors to seize IRA assets from individuals who declare bankruptcy. But, that effort fizzled when bankruptcy reform legislation failed to pass.

This is why it may be preferable to leave your money in a 401(k) rather than transferring the money to an IRA if stronger protection from creditors is a major concern. I recommend contacting an attorney who is familiar with this area of the law for specific advice regarding the best course to pursue to protect your assets.

Question: I'm retired at age 66 and want to know the best way to withdraw from my 401(k) plan to minimize the tax bite. Is there a better option than 10-year forward averaging?

TB: Ten-year forward averaging is a technique that may reduce the tax you have to pay when you withdraw your money in a lump sum from a 401(k) plan. The tax advantage gained by using 10-year forward averaging is limited and in some instances there isn't any advantage.

You should consider leaving the money in a tax-deferred account and withdrawing the money over a period of years, unless there is some reason why you need all the money immediately. Continuing to shelter investment income from taxes when you are withdrawing the money over a period of years is a big advantage offered by a 401(k) plan. You should consider having a tax expert run various scenarios for you to review because the best alternative may depend upon personal factors that should be considered.

Question: My company is changing from an annual match payment to quarterly deposits. Are there any disadvantages to this for employees?

TB: This change will be advantageous assuming the amount of the employer-matching contribution will be the same as it was in the past. The money will be invested sooner, which will increase your long-term return.

Being able to invest these contributions four times per year rather than just once can also reduce your risk somewhat during turbulent periods because it means you will be purchasing shares at four different prices during the year.

Ted Benna, creator of the first 401(k) retirement savings plan, will answer your most intriguing questions every Tuesday. With over 30 years of experience as an employee benefits consultant, Ted is a nationally recognized expert on benefits issues. He has authored two books, Helping Employees Achieve Retirement Income Security and Escaping the Coming Retirement Crisis, and is President of the 401(k) Association. Ted is a frequent speaker at meetings of 401(k) plan sponsors and participants. His articles and comments have appeared in numerous publications, including The New York Times and The Wall Street Journal.

Read Ted Benna's Biography

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The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.

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