Are My Retirement Accounts Protected From Creditors? (2024)

Under longstanding Pennsylvania law, retirement savings vehicles like individual retirement accounts (IRAs), 401(k) and 403(b) accounts, pensions, and employee stock ownership plans (ESOPs) are generally exempt from creditor claims. In particular, judgment creditors are prohibited from attaching or executing upon funds in such accounts. What this means is that if a judgment is entered against you, such as unpaid credit card accounts or real estate taxes, the creditor cannot access the funds in your retirement account to satisfy the judgment. Accounts that are “inherited” do not have the same protections.

Inherited Retirement Accounts

Retirement account owners can and should designate beneficiaries to receive the account after death, thereby creating “inherited IRAs” owned by the beneficiaries. Inherited IRAs are subject to different rules than IRAs created during one’s lifetime. Under the 2019 SECURE Act, inherited IRAs must be drawn down within ten years of the original owner’s death unless the beneficiary is an “eligible designated beneficiary,” i.e., a surviving spouse, a disabled or chronically ill individual, an individual not more than ten years younger than the original owner, or a child of the original owner who has not reached the age of majority. If the beneficiary of the original IRA is a trust or other entity, it must be fully distributed within five years (with some exceptions, of course).

Vulnerable to Creditor Claims

In Jones v. McGreevy, 2022 PA Super 8 (1/11/2022), a debtor owed money to creditor after failing to make payments under a purchase agreement. The creditor sued the debtor and obtained a judgment in his favor. The creditor then attempted to collect the judgment by garnishing the debtor’s various accounts, including an inherited IRA from debtor’s father. The garnishment freezes the accounts and ordered the bank to send an amount sufficient to satisfy the judgment directly to the creditor. In defense, the debtor claimed the inherited IRA could not be accessed by the creditor under Pennsylvania law. After a trial and appeal, the court agreed with the creditor and ordered the money from the IRA to be distributed to the creditor.

Protect Retirement Accounts Left to your Beneficiaries

In our efforts to keep up with the Joneses (or just get by during this period of economic uncertainty), debt has become a normalized part of the American lifestyle. The latest statistics show that the average American has $90,460 and that younger people are falling behind faster and going into delinquency, particularly on credit cards and auto loans. If any of your beneficiaries have debt problems or are unwise with money, you can protect them with some thoughtful planning.

Trust planning: Consider establishing a trust to hold the inherited IRA assets. This can provide an additional layer of protection by placing the assets under the control of a trustee who can distribute funds to the beneficiaries according to the trust's terms. A properly drafted trust may help shield the inherited IRA assets from creditors.

Name a spendthrift trust as beneficiary: If you are the original account owner and want to protect your beneficiaries' inheritance, you may be able to designate a spendthrift trust as the beneficiary of the IRA. This type of trust can limit the beneficiaries' access to the funds and provide creditor protection.

Evaluate disclaiming options: In some cases, beneficiaries may choose to disclaim the inherited IRA assets. By doing so, the assets pass to contingent beneficiaries, effectively bypassing the beneficiary facing creditor claims.

Consider the "Stretch IRA" strategy: Prior to 2020, beneficiaries had the option to "stretch" the required minimum distributions (RMDs) from inherited IRAs over their lifetimes. This allowed for continued tax-deferred growth and potential protection from creditors. However, the SECURE Act passed in 2019 eliminated the stretch IRA for most beneficiaries, limiting the deferral period to ten years, with some exceptions.