Table of Contents
Table of Contents
In many cases, laws help protect retirement savings from creditors, but there are limitations. The limitations depend on what type of creditor you're dealing with, the types of retirement accounts you have, the state you live in and other factors.
Whether you're involved in a lawsuit, you default on loans or you owe tax debts, it might be best to discuss the details with a legal expert. State law might provide additional protection that goes beyond federal rules, and an expert can help you navigate those waters. Here is some information to consider.
- ERISA helps protects employer-sponsored plans from general creditors.
- IRAs have varying degrees of protection based on circumstances.
- Inherited IRAs are less shielded, and tax debts can impact both plans.
Workplace Retirement Plans
Many employer-sponsored plans are protected by the Employee Retirement Income Security Act (ERISA).1 General creditors cannot force you to remove funds from a 401(k) plan or other qualified retirement plans, which includes 401(k), 403(b), pension and cash balance plans, and other arrangements. These are some exceptions.
If you are divorced and owe money to an ex-spouse, they may have rights to your retirement savings. Under a Qualified Domestic Relations Order (QDRO), an ex-spouse can satisfy child support, alimony or other marital property rights through your retirement plan.2 To do so successfully, the order likely needs to meet specific criteria.
Federal tax debts
When you owe the IRS money, your 401(k) is fair game. The IRS has the right to levy (or seize) assets from retirement accounts, a method that's usually unavailable to other creditors.
What happens if you move money in your retirement savings to an individual retirement account (IRA)? As individual accounts, IRAs typically don't fall under the same set of rules that cover employer-sponsored plans. IRAs are protected in many cases, and details depend on the specific situation. Here are some examples:
Rollovers from employer accounts
When you roll money over from an ERISA-governed workplace plan, you might keep the same level of protection as an employer-sponsored plan. You'll likely need to document the source of those funds to prove that your assets originally came from a qualified retirement plan.
Individually funded accounts
You still might be able to protect retirement savings when you fund your IRA from personal accounts or self-employment earnings. State laws provide relief in some cases, but the specifics vary from state to state. If you declare bankruptcy, federal law may allow you to keep money in your IRA under the Bankruptcy Abuse Prevention and Consumer Protection Act.3
Inherited accounts are typically less protected from creditors than standard IRAs. The U.S. Supreme Court ruled that assets in an inherited IRA would not be protected during bankruptcy, but it only applies to bankruptcy proceedings.4
As with employer-sponsored plans, there is no asset protection in your IRA when you owe the IRS money.
States determine whether or not creditors can access your retirement savings, and those cases might include:
- Civil and criminal proceedings
- Alimony payments
- Defaulted loans
Getting the Answers
Your retirement funds are often safe from creditors, but that's not always the case. This only covers some of the potential scenarios, so you'll likely still want to talk to a legal expert for more information on how to help protect retirement savings.
- Employee Retirement Income Security Act (ERISA). https://www.dol.gov/general/topic/retirement/erisa.
- Retirement Topics - QDRO - Qualified Domestic Relations Order. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-qdro-qualified-domestic-relations-order.
- Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). https://www.uscourts.gov/data-table-report-names/bankruptcy-abuse-prevention-and-consumer-protection-act-bapcpa.
- Inherited IRAs in Bankruptcy. https://tjtpa.com/inherited-iras-in-bankruptcy/.