Whether a creditor can seize your retirement savings will depend on the type of account in which you are holding your money and the type of creditor that is seeking repayment. In a nutshell, your nest egg is usually protected from general creditors, but it is not protected from governmental organizations to which you owe money.
- Funds held in qualified retirement plans—401(k), IRA, and pension plans—are usually protected from general creditors, unless they were used as loan collateral.
- Qualified retirement plans are generally not protected from federal agency creditors.
- Retirement plan assets are also somewhat protected in case of bankruptcy.
Protection Against General Creditors
Your 401(k), IRA, and pension plan funds are protected from general creditors to whom you may owe outstanding debts. Plans set up under the Employee Retirement Income Security Act (ERISA), like 401(k)s, Simplified Employee Plan (SEP) IRAs and Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) IRAs, are generally protected from court judgments. Such protection does not hold, however, if you have named these financial assets as security for any loans.
If you are in bankruptcy proceedings, there is still some protection against any creditors seizing all of your retirement assets. Federal bankruptcy laws have long protected 401(k) plans and other employer-sponsored retirement savings programs.
Protection for IRAs was signed into law by President George W. Bush under the Bankruptcy Abuse Prevention and Consumer Protection Act, or BAPCPA, of 2005. Both traditional and Roth IRAs are protected to a total dollar value of $1,362,800 per person. This limited protection applies to the sum of all traditional and Roth IRA accounts held by a given individual, not to each IRA account in isolation.
The dollar value is adjusted every three years; the current sum holds good until 2022. Accounts in excess of $1,362,800 are not protected under BAPCPA, but the law states that bankruptcy courts are free to extend additional protection if justice warrants it and the judge decides to grant it.
No Protection Against the Feds
If your creditor is a federal agency, such as the Internal Revenue Service (IRS) or the Dept. of Education (if you have public student loans), then none of your accounts, not even your 401(k) plan or your pension plan, is protected. The IRS doesn't require a court order to garnish your money for back taxes, child support or alimony, either—it can do it on its own.
Now, the fact that these pension and 401(k) plans legally belong to your employer does offer some protection from federal tax liens. Under the Employment Retirement Income Security Act of 1974 (ERISA), the funds in your 401(k) only legally belong to you once you withdraw them as income. Until then, they're legally the property of the plan administrator—your employer—who cannot release them to anyone but you.
As a result, the IRS is unlikely to be able to force these funds directly out of your account. However, it can requisition all or a portion of any distributions you take—that is, any money you withdraw.
To ensure that a rollover from a qualified retirement plan is protected from a creditor, it helps to create a separate account just for those assets.
What You Can Do
Money held in qualified retirement plans, such as IRAs, 401(k)s, and pension plans, will likely be protected.
Even so, to prevent your creditors from seizing any of your retirement savings, you should be sure to maximize your eligible contributions to registered retirement accounts and never name any retirement savings as security for a loan. Keep funds in retirement accounts as long as you can. Once they leave it, they may be seizable during bankruptcy or collection processes.