Protecting assets
What to know about umbrella coverage
Q: I’ve read that your umbrella insurance coverage should equal your total assets. But wouldn’t most retirement assets be protected in a lawsuit and, therefore, you should only get coverage equal to your non-retirement assets?
A: You are correct that many employer plans, such as 401(k)s, have unlimited protection in most cases. However, the protection exists only while the money is in the account, so when you take withdrawals to live off of the saved money, the withdrawals can be subject to claims at that point, says Neil Brown, a financial planner in West Columbia, S.C.
Traditional IRAs and Roth IRAs do have some protection, but it depends upon the type of judgment. They have limited bankruptcy creditor protection at the federal level (up to $1,362,800 for 2020) and protection can vary at the state level. Beyond bankruptcy protection, IRA assets are not federally protected from lawsuits.
Keep in mind that if you are still working, you are not just protecting your assets but future income as well. Some courts have provided injured parties a garnishment on future wages, Brown says.
“While a good rule of thumb is to have an umbrella policy equal to unprotected assets, a better rule is to look at your specific situation and use that as a starting point,” Brown says. “Umbrella coverage is relatively inexpensive, but when you do need it, you don't want to come up short.”
Q: I understand that starting in 2020, the mandatory required minimum distribution age rises from age 70 to age 72. Will the IRS be changing the life expectancy tables for this year?
A: A change in law under the Secure Act raises the RMD age to 72, effective this year. But that change in law didn't change the life expectancy factors in the IRS tables, which you can find in IRS Publication 590-B. To calculate an RMD, you divide the retirement account balance from the end of the previous year by the life expectancy factor for your birthday in the current year.
Separately, the IRS has proposed modifying the life expectancy tables to account for longer life expectancies starting in 2021 and beyond. The proposed changes are going through the regulatory process. If the changes are finalized, the new factors would trim annual RMDs, which would be useful for retirees who don't need to withdraw extra money out of a retirement account.
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