Is an IRA protected from creditors?
Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, IRAs and most other retirement accounts are protected from creditors, even if the account holder declares bankruptcy.
IRAs don't offer the same protection as 401(k)s
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.
| Type of Account | Bankruptcy protection | Legal liability protection |
|---|---|---|
| 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 |
Whether your individual retirement account (IRA) can be taken in a lawsuit depends largely on your state of residence and the judgment in question. There are no federal protections in place shielding your IRA from seizure in a lawsuit.
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.
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.
- Social Security, and other government benefits or payments.
- Funds received for child support or alimony (spousal support)
- Workers' compensation payments.
- Retirement funds, such as those from pensions or annuities.
IRAs, including Roth IRAs, are governed by state laws, and federal ERISA laws govern 401(k) plans and other qualified plans. ERISA plans are generally protected from seizure by creditors, so monies in your 401(k) plan would typically be more protected against lawsuits than your individually owned Roth IRA.
Social Security Benefits That Are Not Protected
Officially called the Treasury Offset Program, Social Security and other federal retirement benefits can be garnished if you owe: Unpaid federal taxes. Unpaid federal student loans.
As an FDIC-member bank, the FDIC insures deposits (cash and CDs) up to $250,000 (principal and interest) for each account holder in a federally insured institution. (For IRAs, the insured amount may be $250,000.) These amounts cover shortfalls in each account in each separate bank.
How do I protect my IRA from lawsuits?
Umbrella insurance policies and professional malpractice insurance are two great ways to safeguard your IRAs. In this case, you can still receive the benefits of IRAs, which are more attractive due to the lower associated fees and investment flexibility in comparison to other employer-sponsored plans and 401(k)s.
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.
In general, retirement plans that are covered by ERISA are protected from creditors—and their lawsuits. A 401(k) is an ERISA-qualified plan, so it is likely protected if you get sued. There may be a few exceptions, such as charges brought by the federal government or if you allegedly wronged the plan.
Yes, the IRS can seize your retirement accounts and/or garnish your pension payments and Social Security benefits for back taxes. Typically, the IRS tries to avoid seizing retirement accounts, but the agency will pursue this collection action as needed.
In one word, no. Recently, in a unanimous decision, the U.S. Supreme Court held that inherited IRAs are not “retirement funds” within the meaning of federal bankruptcy law; therefore, they are available to satisfy creditors' claims.
The IRS may garnish up to twenty-five percent (25%) of your income from a retirement account. In addition to pensions and retirement accounts, the IRS may take up to fifteen percent (15%) of your Social Security check under the Federal Payment Levy Program.
Many seniors are “judgment proof,” which means their income is derived from retirement, Social Security, or other accounts that can't be garnished. Debt collectors may not bother to take seniors in this situation to court, since they're unlikely to get the money that way.
Debt collectors cannot harass or abuse you. They cannot swear, threaten to illegally harm you or your property, threaten you with illegal actions, or falsely threaten you with actions they do not intend to take. They also cannot make repeated calls over a short period to annoy or harass you.
If you are struggling with debt and debt collectors, Farmer & Morris Law, PLLC can help. As soon as you use the 11-word phrase “please cease and desist all calls and contact with me immediately” to stop the harassment, call us for a free consultation about what you can do to resolve your debt problems for good.
If your wages or bank account have been garnished, you may be able to stop it by paying the debt in full, filing an objection with the court or filing for bankruptcy.
What is the best way to protect your assets from creditors?
Transfer Assets
Creditors or litigants cannot seize assets you do not own—assuming the asset transfer does not violate illegal conveyance laws. Giving assets directly or through an unbreakable trust to your spouse, children or other relatives is an easy and effective way to protect those assets.
You should be careful about what information you give creditors. Creditors need court orders to access your bank account. Without a legal order, your creditor most likely does not have the right to your bank information.
Irrevocable trusts give the grantor no flexibility and strip them of control over the asset once the asset is placed in the trust. This greater sacrifice in turn grants better protection because it essentially takes the asset away from the grantor and therefore takes it out of reach of the creditor.
Irrevocable Trusts
Using an irrevocable trust allows you to minimize estate tax, protect assets from creditors and provide for family members who are under 18 years old, financially dependent, or who may have special needs.
Debt payoff may seem like a good use of IRA funds now, but it can jeopardize your retirement savings and put you in a worse financial state later. You need to let the funds grow over time, and reducing the balance now could seriously impair your savings potential in the future.
