Money Myth: Retirement Accounts Count as Assets

When you put money into a regular IRA, a Roth IRA or a 401(k), you are accumulating funds that you plan to use in retirement. But do these funds count as your assets? Do retirement assets increase your financial net worth?

Taking a look at your personal financial statement can help answer these questions.

​Consider also​: Every Bit Counts When Saving for Retirement

A personal financial statement provides the details of a person's assets and liabilities at a specific point in time. There are various types of assets included in this statement:

• cash and bank accounts
• savings accounts
• IRAs and other retirement accounts
• accounts and notes receivable
• cash value of life insurance
• stocks and bonds
• real estate
• automobiles
• other personal property

Note that IRAs and retirement accounts are listed as assets on an individual's personal financial statement.

Liabilities are the debts that an individual owes. There are several that are typically included in a personal financial statement:

• accounts payable
• notes payable to banks
• installment loans
• loans against life insurance
• real estate mortgages
• unpaid taxes
• other liabilities

An individual's net worth is found by subtracting total liabilities from total assets. And since retirement accounts are considered assets, they would form a portion of a person's net worth.

​Consider also:​ Total Equity vs. Net Assets

If retirement accounts are assets, how would they affect your loan applications?

When you're applying for a mortgage or a car loan, lenders will look at your debt ratio, credit rating and other indicators of creditworthiness such as loan payment history. They will not be looking at how much money you have in your retirement accounts as a qualifying factor or security for a loan.

Nevertheless, lenders like to see borrowers with substantial net worths because it's a sign of a person's financial savvy and fiscal health. It gives lenders more confidence that a borrower will be a responsible person and make every attempt to repay the loan.

You cannot borrow funds from your IRA accounts. You can only take a distribution that you must pay back within a certain period of time; otherwise, you'll incur a penalty.

However, you can take loans against your 401(k) under specific circumstances like starting a new business. It's a good idea to consult a professional tax advisor before borrowing against your 401(k) to make sure you're complying with the regulations.

Retirement accounts set up under the Employee Retirement Income Security Act (ERISA) are usually protected from seizure by creditors. To gain this protection, the employer-provided plan must meet certain requirements such as being partially funded by the employer and guaranteeing annuity benefits to employees upon retirement.

In most cases, a creditor cannot seize the funds in a 401(k) except for any debts owed to the federal government, like student loans or taxes due to the IRS.

However, ERISA does not offer the same protection from creditors for a regular IRA and a Roth IRA. Although IRAs have some protection in bankruptcy proceedings, each state has its own regulations regarding the degree of protection. Most commonly, states will allow claimants to garnish IRAs for delinquent payments of alimony and child support.

When the owner of a 401(k) or IRA dies, these retirement accounts are assets that pass to the beneficiary. Depending on whether the beneficiary is a surviving spouse or another individual, the tax consequences can be complicated.

The funds from the deceased's retirement accounts could be rolled over into the beneficiary's retirement accounts, or the IRS may require them to take distributions, which might create taxable consequences. Each person's situation is unique, and the beneficiary should seek the advice of a tax consultant.

​Consider also​: Difference Between Pension & Retirement Plan