Do Retirement Accounts Count as Assets?
Retirement funds are considered assets, but how they are defined and protected changes significantly based on the specific financial or legal context.
A retirement account is an asset, which is anything a person owns that has monetary value, including 401(k)s and Individual Retirement Accounts (IRAs). While these funds are assets, their treatment and accessibility differ from cash in a checking account. How a retirement account is handled depends on the specific financial or legal situation, as its value and rules for access are not always straightforward.
Inclusion in Personal Net Worth Calculations
When calculating personal net worth, retirement accounts are always included as an asset. These accounts represent a significant source of future economic value and are a major component of household wealth for many Americans.
The inclusion of these funds in a net worth statement comes with caveats that distinguish them from more liquid assets. Accessing the money before retirement age, typically 59½, usually triggers a 10% early withdrawal penalty from the IRS on top of ordinary income taxes, though several exceptions exist, including for certain emergency needs. This illiquidity means the full balance is not immediately available without incurring costs, a factor to consider when assessing one’s financial position.
The tax treatment of the account also affects its true value. For pre-tax accounts like a traditional 401(k) or IRA, income taxes will be due on withdrawals in retirement. In contrast, funds in a post-tax Roth IRA are tax-free upon withdrawal. To get a more precise net worth figure, some financial experts suggest discounting the value of pre-tax accounts by an estimated future tax rate.
Treatment During Divorce Proceedings
During a divorce, retirement funds are considered marital property and are subject to division. The portion of an account earned or contributed during the marriage is included in the marital estate to be divided between spouses. Funds accumulated before the marriage may be considered separate property, though any growth on those funds during the marriage could be deemed marital.
The legal mechanism to divide employer-sponsored plans like 401(k)s is a Qualified Domestic Relations Order (QDRO). A QDRO is a court-issued judgment that instructs a plan administrator to pay a portion of a participant’s retirement benefits to an alternate payee, such as an ex-spouse. This order allows for a penalty-free transfer, as moving money without a QDRO would be a taxable distribution for the account holder.
Once a QDRO is approved, the former spouse can roll the awarded funds into their own IRA or take a cash distribution. The process for dividing IRAs is different and does not involve a QDRO; instead, a “transfer incident to divorce” is executed based on the divorce decree.
Protection in Bankruptcy Filings
Federal law provides protection for retirement accounts during bankruptcy, shielding them from creditors. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) established these safeguards for both Chapter 7 and Chapter 13 cases. Under BAPCPA, most employer-sponsored plans covered by the Employee Retirement Income Security Act (ERISA), such as 401(k)s and 403(b)s, are fully protected from creditors, regardless of their value.
For IRAs and Roth IRAs, the protection is capped. Federal law shields these accounts up to an aggregate value of $1,711,975 per person, a figure adjusted for inflation every three years. This limit applies to contributory IRAs. Rollover IRAs, which are funded with money from an employer-sponsored plan, are fully protected without a dollar limit, preserving their protected status from the original plan.
Impact on Financial Aid Applications
When applying for college financial aid, the treatment of retirement accounts is favorable for families. The value of qualified retirement plans, including 401(k)s, 403(b)s, and IRAs, is not reported as an asset on the Free Application for Federal Student Aid (FAFSA).
Funds held in standard brokerage accounts, savings accounts, or even 529 plans must be reported as assets, which can reduce the amount of aid offered. By prioritizing saving in retirement accounts, parents can build a nest egg that is not counted in the federal aid formula.
This protection applies only to the asset value. If a parent or student takes a distribution from a retirement account, those funds are counted as income on the following year’s FAFSA. This can substantially affect aid eligibility.
Consideration for Government Assistance Programs
The favorable treatment of retirement accounts does not always extend to government assistance programs like Medicaid or Supplemental Security Income (SSI). For these need-based programs, retirement accounts are often considered “countable assets,” and the rules vary significantly by state. The balance in a 401(k) or IRA could disqualify an applicant if it exceeds a program’s asset threshold.
For example, California no longer considers assets for its Medicaid program, but other states do. In some jurisdictions, a retirement account may be exempt only if it is in “payout status,” meaning the owner is taking regular distributions. However, these distributions are then counted as income, which can also affect eligibility.
An individual applying for long-term care through Medicaid might be required to spend down their retirement funds before becoming eligible for benefits. This underscores the importance of understanding the specific rules of each government program.