Most investors understand the significant tax benefits of using their qualified retirement accounts — such as their 401(k)s, IRAs and Roth IRAs — to build long-term wealth. But did you know that these types of accounts also provide creditor protection?
One of the lesser-known benefits of retirement accounts is this — Federal statues offer retirement accounts special treatment when subject to the claims of creditors. This creditor protection can be a valuable tool in the event of a legal liability, personal injury lawsuit, or bankruptcy. Accounts that receive special protection include 401(k) plans, pension plans, profit sharing accounts, SEP IRAs, SIMPLE IRAs, 403(b) plans, 457 plans, traditional IRAs, and Roth IRAs.
It is important to understand how federal and state laws affect these rights. Each type of qualified retirement account is subject to a specific jurisdiction and offers varying degrees of security.
Account protection from creditors
Employer-sponsored retirement accounts — such as 401(k)s, pension plans, and profit sharing accounts — are governed by federal laws outlined by the Employee Retirement Income Security Act of 1974 (“ERISA”).¹ These types of plans have unlimited protection in the event of bankruptcy and other legal liability. Most 403(b) and 457 plans also provide the same unlimited protection.
Employer-sponsored IRA accounts — such as SEP IRAs and SIMPLE IRAs — have unlimited protection for bankruptcy under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”),² while state laws define the how non-bankruptcy liabilities are handled.
Traditional IRAs and Roth IRAs are protected for bankruptcy up to $1,512,350³ under this Actas of 2022. (This protection limit is updated every three years, so will be updated sometime in 2025.) Again, state laws dictate the rules for non-bankruptcy liabilities.
Note that the creditor protection offered for both ERISA plans and IRA-based accounts are only available in the event of bankruptcy and certain legal liabilities. They do not apply to an ex-spouse’s claim pursuant to a divorce proceeding, taxes and penalties due to the Internal Revenue Service, federal criminal fines, or wrongdoing against the retirement plan itself.
Quick reference guide
| Type of Account | Bankruptcy protection | Legal liability protection |
| 401(k)s | Unlimited protection1 | Unlimited protection1 |
| Pension plans | Unlimited protection1 | Unlimited protection1 |
| Profit sharing accounts | Unlimited protection1 | Unlimited protection1 |
| SEP IRAs | Unlimited protection2 | Regulated by state |
| SIMPLE IRAs | Unlimited protection2 | Regulated by state |
| 403(b) plans | Unlimited protection1 | Unlimited protection1 |
| 457 plans | Unlimited protection1 | Unlimited protection1 |
| Traditional IRAs | Aggregate protection up to $1,512,350 (2022)2 | Regulated by state |
| Roth IRAs | Aggregate protection up to $1,512,350 (2022)2 | Regulated by state |
1. Based on ERISA guidelines | 2. Based on BAPCPA guidelines
Account withdrawal protection from creditors
Furthermore, withdrawals from an ERISA retirement plan can retain an enhanced level of creditor protection depending on the destination of the withdrawal:
- Funds deposited to another employer’s ERISA plan maintain unlimited protection for both bankruptcy and legal liability.
- Funds deposited to an IRA account consisting solely of rollover funds maintain unlimited protection for bankruptcy, but not for legal liability (this is determined by state laws).
- Funds deposited to an IRA account which includes non-ERISA contributions (a “comingled” IRA) are protected for bankruptcy up to the $1,512,350 until March 31, 2025. Legal liability is subject to state laws.
- Funds withdrawn as cash distributions are no longer protected against claims.
Each state has its own regulations for dealing with non-bankruptcy claims. For example, Illinois law provides unlimited protection against legal liability for traditional IRAs and Roth IRAs (as well as for any qualified retirement account not covered by ERISA). Be aware that most states do not endow “inherited IRAs” with creditor protection.
Understanding exactly which assets are protected from specific types of creditors — and which are not — is a critical component to the construction and maintenance of your comprehensive financial plan. It is important to remember that the concepts above are guidelines based on current laws, which of course, can change over time, and that every individual’s financial planning needs are unique. If you have any questions about how your specific retirement accounts are impacted, please contact your wealth advisor.
Published January 2024
1. Employee Retirement Income Security Act of 1974 (ERISA).
2. Bankruptcy Abuse Prevention and Consumer Protection Act of 2005
3.https://www.thebankruptcysite.org/exemptions/federal.html
FAQs
The Employee Retirement Income Security Act Explained. It all starts with the Employee Retirement Income Security Act. Under this Act, most qualifying retirement accounts are protected from creditors, civil lawsuits, and even bankruptcy proceedings.
Are retirement accounts protected from creditors? ›
Most employer-sponsored retirement plans, such as a 401(k), fall under ERISA guidelines and are protected from creditors. Non-ERISA plans—such as traditional and Roth IRAs—typically do not have the same level of creditor protection, unless the funds were rolled over from an employer-sponsored plan, like a 401(k).
Can they take your retirement accounts if you get sued? ›
In California, these accounts are protected only up to the amount necessary to provide reasonable support for you, your spouse, and your dependents upon retirement (all assets and accounts will be taken into consideration before exposing an IRA).
What type of accounts are protected from creditors? ›
Quick reference guide
| Type of Account | Bankruptcy protection | Legal liability protection |
|---|
| 401(k)s | Unlimited protection1 | Unlimited protection1 |
| Pension plans | Unlimited protection1 | Unlimited protection1 |
| Profit sharing accounts | Unlimited protection1 | Unlimited protection1 |
| SEP IRAs | Unlimited protection2 | Regulated by state |
5 more rowsThe general answer is no, a creditor cannot seize or garnish your 401(k) assets. 401(k) plans are governed by a federal law known as ERISA (Employee Retirement Income Security Act of 1974).
Can debt collectors go after your retirement? ›
Under the Employee Retirement Income Security Act (ERISA), creditors are generally not able to seize funds from pensions and employer-sponsored retirement accounts. Creditors may target funds in traditional and Roth IRAs and certain 403(b) plans, which are typically not protected under ERISA.
Can creditors go after retirement accounts after death? ›
Creditors cannot go after your 401(k) when you die. Your executor will settle debts out of your estate but not your 401(k) unless you didn't name any beneficiaries.
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 rowsThis is excellent news for the majority of Americans, as it turns out that one of the most effective ways to protect assets is to shield them in retirement accounts. Individual retirement accounts, 401(k)s, and other types of tax-efficient plans can help you prevent the loss of your assets in case of a lawsuit.
Can a creditor garnish my retirement check? ›
Federal income retirement benefits are protected from commercial garnishment through the federal Consumer Credit Protection Act.
Certain types of income cannot be garnished or frozen in a bank account. Foremost among these are federal and state benefits, such as Social Security payments. Not only is a creditor forbidden from taking this money through garnishment, but, after it has been deposited in an account, a creditor cannot freeze it.
Can a creditor take all the money in your bank account? ›
Can a debt collector access my bank account? Yes, a debt collector can take money that you owe them directly from your bank account, but they have to win a lawsuit first. This is known as garnishing. The debt collector would warn you before they begin a lawsuit.
What bank account can the IRS not touch? ›
What Accounts Can the IRS Not Touch? Any bank accounts that are under the taxpayer's name can be levied by the IRS. This includes institutional accounts, corporate and business accounts, and individual accounts. Accounts that are not under the taxpayer's name cannot be used by the IRS in a levy.
Can I lose my IRA in a lawsuit? ›
There are no federal protections in place shielding your IRA from seizure in a lawsuit.
Can someone go after your 401k in a lawsuit? ›
To summarize, most employer-sponsored or employer-managed retirement accounts are protected from creditors. If you have a 401(k), the odds are good that the account is protected against all kinds of creditor-related threats, lawsuit damages, and similar claims.
Can creditors take money from an 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.
What states protect your IRA from creditors? ›
The safest states to live in for protecting IRA funds include Arizona, Texas, and Washington. Arizona state laws only allow the judgment creditor to seek retirement funds during bankruptcy from the last 120 days of contributions, meaning everything prior has 100% legal protection.
How do I protect my retirement account? ›
5 ways to help protect retirement income
- Plan for health care costs.
- Expect to live longer.
- Be prepared for inflation.
- Position investments for growth.
- Don't withdraw too much from savings.
