Asset Protection, Multiple Needs and Strategies

Asset protection involves strategies that help safeguard your wealth from potential lawsuits, creditors, or unexpected financial risks. It helps ensure long-term financial security, especially for individuals with significant investments, deferred compensation, pensions, or business interests.

Asset protection strategies are state-specific, as the types of accounts and amount of home equity that are protected from creditors varies. States also vary in which types of accounts are accepted or acknowledged for asset protection purposes. In addition, geographic local, professions and assets owned also affect types, degrees of harm and likelihoods for catastrophic loss. Read more about asset protection on Wise Money Decisions.

A general rule is to make sure your auto liability is at least around 250/500 and 300,000 on homeowners, since those are common minimums required before adding an umbrella policy. A common guideline is to have umbrella coverage close to or equal to your net worth, and maybe more to protect future earnings.

However, the types of assets that are protected from creditors varies from by state which can affect the amount of umbrella liability needed for proper protection.

Deferred compensation plans are income or benefits you earn now but receive in the future, usually once retired. Because they may grow and be substantial, they can attract, and be susceptible to, legal claims. Protecting these benefits through proper titling and insurance is a key strategy for asset protection planning.

In addition, many are unaware that deferred compensation remains an asset of the company until paid out as a benefit. This means deferred compensation assets are open to creditors of the business until they are paid out. Since these assets can remain in deferral for decades and pay out over 10+ years, company default risks are worth considering.

After-tax contributions to a 401k do not count towards the annual contribution limit enabling participants to greatly increase their utilization of qualified plans for tax advantaged treatment. Earnings and growth on after-tax balances that remain in 401k plans are treated as pre-tax, meaning the earnings are taxed at ordinary rates when withdrawn in the future.

Therefore, consistent (at least annually) rollovers of AT balances to Roth IRAs changes the tax treatment on the earnings and growth from pre-tax to tax free presenting an attractive way to build substantial wealth in tax free Roth vehicles.

Using after-tax dollars in a 401(k), rolling them to a Roth IRA, and coordinating contributions can create a “Mega Backdoor Roth” strategy that may allow you to move tens of thousands of dollars per year into Roth accounts with tax-free growth.