California residents now face the reality of reduced protections for both tax-qualified plans and IRAs.
As of January 1, 2025, a new California law will change the landscape for tax-qualified retirement plans, potentially reducing asset protection for California residents. For those with 401(k)s, profit-sharing plans, or other tax-qualified retirement plans, this new law poses significant concerns. As a California-based self-directed IRA company, we want to provide clarity on these changes and suggest potential asset protection strategies.
Understanding the New Law: What’s Changing?
Previously, California law – similar to the Employee Retirement Income Security Act (ERISA) – offered full protection from creditors for assets held within tax-qualified retirement plans, including 401(k) and profit-sharing plans. These protections also extended to distributions, as long as they were kept in a segregated bank account, allowing Californians peace of mind that their retirement assets were secure.
However, under the new amendment to California Code of Civil Procedure Section 704.115, the protection once offered to tax-qualified retirement plans is now limited. Starting in 2025, a California judge will determine how much of a debtor’s retirement plan assets are necessary for living expenses and how much can be handed over to creditors. This will limit the protection of retirement savings from creditor claims, reducing the amount of wealth shielded from seizure.
Limited Protection for IRAs in California
It’s important to note that California has always limited protection for IRAs (including Roth and SEP IRAs). Instead of the blanket exemption offered to 401(k)s and other ERISA-qualified plans, California applies a means test to IRAs. This means that for a debtor to claim an exemption, a judge will evaluate their assets outside the IRA, as well as the time remaining until retirement. If a debtor has substantial assets outside the IRA or has many years left until retirement, the IRA may not be protected from creditors under California law.
With the new law, this means test will also apply to distributions from tax-qualified retirement plans, including 401(k)s, SEP IRAs, and profit-sharing plans, diminishing the protection Californians have enjoyed.
What Protections Remain?
Federal law continues to provide strong protections under ERISA. Assets within an ERISA-qualified retirement plan are protected from creditor claims, with no dollar limitation. Fortunately, federal law overrides California law in this area, so Californians can retain full protection for assets within ERISA-qualified plans. However, this federal protection does not extend to distributions; once funds leave the plan, they lose ERISA’s unlimited protection and fall under California’s partial exemption.
Additional protection can come in the form of insurance. Insurance policies that protect against liability from lawsuits filed by other people or businesses typically include two types of protection. The first is indemnity coverage, which is the insurance company’s promise to pay a judgment against the policyholder after a lawsuit. The second is the insurance company’s promise to defend the policyholder against a lawsuit before a judgment is even entered.
Navigating Asset Protection in Light of the New Law
These changes call for new strategies for California account holders, especially those concerned with protecting their retirement assets from potential creditor claims. Here are two primary options to consider:
- Consider Moving to a State with Full Exemption Laws
For some Californians, relocating to a state that fully exempts retirement plan assets from creditor claims could be an option. States like Texas and Florida, for instance, provide robust protections for retirement assets, which may offer greater peace of mind for individuals whose retirement accounts represent a significant portion of their net worth.
Attorney John Hyre offers these comments: The move can be once litigation (e.g., a new potential creditor appears) has begun, perhaps even after a judgment has been rendered, but before collection has begun. The jurisdiction of residence generally is the relevant one for collection, even if residence started “yesterday”.
- Rolling Over to a Self-Directed IRA with Overseas Investments
For those who wish to remain in California, another option is to roll over their retirement plan assets into a self-directed IRA. A self-directed IRA offers access to a broader range of investment opportunities, including international assets. By moving assets outside of the United States, individuals may be able to add a layer of asset protection, as collecting against international assets can be more challenging for creditors.
Note: While a self-directed IRA can offer more investment flexibility and asset protection potential, California still imposes a means test on IRAs. Thus, individuals should consult with an asset protection attorney to determine the best strategy for protecting IRA assets and distributions.
Consult with an Asset Protection Attorney
Given the complexities of the new law, it’s essential for California debtors to seek legal advice to safeguard their retirement savings. Those who are not yet taking distributions may still consider rolling their IRA assets into an ERISA-qualified plan, preserving federal protection for as long as possible. However, this approach may only work for those not nearing age 73, when required minimum distributions (RMDs) must begin.
California’s creditor-friendly environment now poses a new challenge for retirement planning, making professional guidance more critical than ever. As laws evolve, working with a knowledgeable attorney can help California residents navigate these changes and make informed decisions about their retirement assets.
Final Thoughts
The new California law represents a significant shift in asset protection for retirement plans. California residents now face the reality of reduced protections for both tax-qualified plans and IRAs. For those with substantial retirement savings, taking steps to protect these assets is essential. Whether that involves exploring relocation options or rolling over assets into a self-directed IRA with international investments, a strategic approach can help preserve more of your hard-earned wealth.
At uDirect IRA Services, we’re committed to supporting California investors as they navigate these changes. Reach out to us for more information on how self-directed IRAs can offer flexibility and asset protection in this changing legal landscape.
uDirect IRA Services, LLC is here to help you~! We are not a fiduciary and we do not offer tax or legal advice. We do not recommend specific investments, rather we guide you through the process to self-direct your retirement savings into the “alternative assets” you choose. To get started, we offer a free consultation. Schedule yours HERE – To open an account, click HERE. For more details, see the IRS’s 2025 guidance HERE.
