California Private Retirement Plans
By Robert J. Mintz, J.D., LL.M (taxation)
California allows for the creation of a Private Retirement Plan, which is entirely exempt from judgments and bankruptcy. That is, retirement savings plans which are not IRS Qualified Plans may be protected under state law if certain requirements are satisfied. According to the cases that have been decided, these plans must be carefully drafted and maintained, but they are highly flexible in design, need not cover other employees, and can include annual contributions that can substantially exceed those available under the qualified plans or IRAs. No tax deduction is available for these contributions, but that actually works in favor of asset protection since the plans are not subject to the strict funding and compliance rules of ERISA and the Internal Revenue Code. The complete exemption from judgments for amounts in these plans may be highly valuable in a wide variety of circumstances and should be considered as a stand-alone asset protection plan or in conjunction with a tax deferred account.
This exemption from judgment also applies to distributions from the Private Retirement Plan so the funds are protected while in the plan and later on in retirement, when the proceeds are withdrawn. As long as the funds can be traced to a distribution from the plan, they can be invested in any manner. For example, if you purchase a home or a boat or gold coins or any other asset with the proceeds, those assets are exempt from judgment.
Benefits of a Private Retirement Plan
- California residents are permitted by law to establish Private Retirement Plans which are exempt from creditor claims and judgments.
- All assets in the plan are completely protected from lawsuits and judgments – even in bankruptcy.
- The contributions to the plan are not tax deductible so:
- No maximum limit on contributions.
- No requirement for covering other employees.
- No annual IRS filings.
- A Private Retirement Plan can be used instead of or in addition to an existing qualified plan.
You can maintain plan funds at whatever financial institution you choose, and you can choose to manage all investments.
A Private Retirement Plan we recently set up for a physician client provides an example of how this works. The client is forty-five years old, married with one child, and earns about $500,000 per year as a member of a local ob/gyn group. His goal was to save as much as he could for retirement in a protected vehicle. A Qualified Plan wasn’t feasible because of limitations on contributions and the cost of covering other employees. He wasn’t sure whether his current income would increase or decrease over time so we established a flexible formula in his plan based on a percentage of his net income over a certain threshold that allowed him to contribute a larger or smaller portion of his surplus cash each year, based on his circumstances at the time. The client hopes to retire at age sixty or earlier, and the plan documents provide that the proceeds can be distributed to him whenever his actual retirement occurs. In these particular circumstances, where the client wanted maximum but flexible contributions in a protected form, without additional employee or administrative costs, the Private Retirement Plan was a good fit with his financial goals. We also considered the fact that for obstetricians, potential malpractice liability continues even after retirement as the statute of limitations is tolled until the patient reaches age eighteen. With continuing liability from an extended term, the ability to withdraw funds at retirement with the proceeds fully protected was an additional benefit of the plan.
A Private Pension Plan must be operated strictly for retirement purposes and misuse of the Plan will disqualify it as exempt under California law.
A growing focus of our practice in recent years is on asset protection planning for individuals to protect against medical expense related liability risks. Medical expenses resulting from an illness or injury to yourself or a family member, represent the single most serious threat to your home, savings and future income.
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