When you fall behind on repaying a debt, whether it's a loan or a credit card balance, the entity you owe money to may not just let it go. And so a creditor might take action by suing you in court to recoup the money it's owed. If a judgment is entered against you, a creditor may be allowed to go after different assets of yours, including money you have in a savings or checking account.
But what about the money you've socked away for retirement? Can creditors go after those funds, too?
The answer is, it depends on the type of account you have and where you live. But if you have an IRA, you should know that a creditor may have a right to go after that money.
IRAs don't offer the same protection as 401(k)s
Employer-sponsored 401(k) plans are protected by the Employee Retirement Income Security Act (ERISA), which means creditors cannot go after them. There are a few exceptions, such as if your creditor is the IRS and the debt in question is an unpaid tax bill. But generally speaking, 401(k) assets are protected from creditors.
The same can't be said for IRAs, though. IRAs aren't covered by ERISA because they're individually owned, as opposed to 401(k)s, which are owned by a plan administrator. And so if you're sued in court and your creditor wins, they may be able to come after your retirement savings in an IRA.
It's worth noting that many state laws protect IRA funds. But that's not universal. In California, for example, your IRA funds are protected only to the extent of money needed to support you and your family at the time of your retirement while taking the total of your assets into account. So if you have a $200,000 IRA balance but it's determined that you only need $100,000 of that for retirement, you might risk losing the remainder of your balance if you owe a creditor that much.
And either way, IRA funds are not protected once you withdraw money from your account. So if you transfer $10,000 from your IRA to your bank account, a creditor can, generally speaking, go after that money without an issue if a court determines it can.
You may want to keep some long-term savings in a 401(k)
The nice thing about IRAs is that you can manage your account yourself, and you'll generally get far more investment choices than with a 401(k). That could result in lower fees, which is a good thing, since fees can eat away at your returns and leave you with less money.
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But if you have an IRA and also have access to a 401(k) plan, then it could make sense to contribute some money to the latter as well. That way, if you're ever in a situation where a creditor comes after your assets, you won't have to worry about losing a chunk of your retirement savings.
Plus, many 401(k) plans offer some type of employer-matching component. That's free money for your retirement, and it's something you won't find with an IRA. So for that reason alone, having a 401(k) on top of an IRA could make a lot of sense.
FAQs
Though IRAs are not protected against creditor claims, they are protected against bankruptcy. Any funds you place in an IRA are protected according to the Bankruptcy Abuse Prevention and Consumer Protection Act. In a nutshell, if you file for bankruptcy, you won't have these funds garnished or taken away.
Can creditors go after your IRA? ›
If your retirement account is not qualified or covered by ERISA, then a judgment creditor could potentially seize it. That is because some non-ERISA accounts in California do not have the same protections as ERISA accounts. Types of non-ERISA accounts that may be vulnerable include: IRAs, Roth IRAs and SIMPLE IRAs.
Can a debt collector take from an IRA? ›
Creditors may target funds in traditional and Roth IRAs and certain 403(b) plans, which are typically not protected under ERISA.
What states protect IRA from creditors? ›
State by State IRA Protection Comparison
| State | IRA Exempt | Roth IRA Exempt |
|---|
| Alaska | Yes | Yes |
| Arizona | Yes | Yes |
| Arkansas | Yes | Yes |
| California* | Partly | No |
46 more rowsYes, if someone files for bankruptcy and they have money from an inherited IRA, those funds can be taken by creditors. This is true even though retirement funds are often exempt in bankruptcy filings.
How to protect your IRA from creditors? ›
To make sure that a rollover IRA from a qualified retirement plan is protected in a bankruptcy, it helps to create a separate account just for those assets.
Are IRAs protected from creditors at death? ›
Can They Be Used to Pay Off Debts? On June 12, 2014, the U.S. Supreme Court unanimously decided that IRAs inherited by anyone other than a spouse are not to be considered retirement funds and, therefore, are not protected from the beneficiary's creditors in bankruptcy.
Is an IRA exempt from garnishment? ›
Can My IRA Be Garnished for Other Debts? There are no federal laws that protect IRAs from creditors, except in the case of bankruptcy and only up to $1,512,350 as of 2022. 4 Your IRA can be garnished by the government to pay your federal debts, such as back taxes owed to the IRS.
What bank accounts are protected from creditors? ›
An “exempt bank account” is an account that contains funds that a creditor cannot use to satisfy a money judgment. State laws allow debtors to shield certain types of bank accounts, including entireties accounts, wage accounts, retirement proceeds accounts, and homestead accounts, from collection by judgment creditors.
How do I protect my social security from creditors? ›
The funds will NOT be protected if you receive a check from SSA and then go to the bank and deposit it into an account. The best way to protect your Social Security Benefits from creditors is to keep a separate account, which only receives direct deposits from Social Security.
If you are sued, creditors may be able to access your retirement savings if you are required to pay a settlement. State protections for IRA funds in a lawsuit vary considerably among the 50 states. Exemptions for traditional IRAs and Roth IRAs are often different.
Can the IRS touch an IRA? ›
IRC § 6331(a) provides that the IRS generally may “levy upon all property and rights to property,” which includes retirement savings.
Is an IRA protected in a bank? ›
FDIC deposit insurance covers retirement accounts in which plan participants have the right to direct how the money is invested, including: Individual Retirement Accounts (IRAs) Self-directed defined contribution plans, such as a 401k or profit-sharing plan.
Can a creditor go after my IRA? ›
Though IRAs are not protected against creditor claims, they are protected against bankruptcy. Any funds you place in an IRA are protected according to the Bankruptcy Abuse Prevention and Consumer Protection Act. In a nutshell, if you file for bankruptcy, you won't have these funds garnished or taken away.
Can debt collectors take money from your IRA? ›
Assets are fully protected from creditors in both types of retirement account. Further, in such states the distributions from such accounts are also protected. But in California, creditors may come after any IRA assets not deemed necessary for living expenses.
Should you use an inherited IRA to pay off debt? ›
If you don't need to use the money right away to pay off debt, then this might be the best option for you. That's because it will give the inherited money a chance to continue to grow and you get to spread what you might owe in taxes into more manageable chunks over a longer period of time.
Can the IRS come after your IRA? ›
In addition to a 401(k) plan, the IRS can also garnish other types of retirement accounts for back taxes, including: Pensions. Traditional and Roth IRAs. SEP and SIMPLE IRAs.
What is protected from creditors? ›
Some assets are considered “exempt” under state and federal law and therefore cannot be reached by creditors. Exempt assets include personal property, such as household furniture, clothing, or jewelry, and tools of a trade or business.
What assets are protected in a lawsuit? ›
Unless you take steps to protect them, most assets are not protected in a lawsuit. One of the few exceptions to this is your employer-sponsored IRA, 401(k), or another retirement account. At Bratton Estate and Elder Care Attorneys, our lawyers recommend putting an asset protection plan in place before you need it.
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