A creditor in most cases will not be able to gain access to your savings held by a 401(k) plan, pension plan, or other type of employer-sponsored retirement plan. The exception, however, is the federal government. The IRS can seize these types of retirement assets to enforce a federal tax levy. Also, assets held within an employer-sponsored plan can be given to an ex-spouse to satisfy a qualified domestic relations order.
If your retirement assets are held in a traditional or Roth IRA, these funds are protected only in a bankruptcy proceeding. As of 2021, up to $1,362,800 in IRA funds may be exempted from a bankruptcy estate.
- Funds held in qualified ERISA plans, such as a 401(k) or pension plan, are generally protected from creditors.
- Federal bankruptcy law provides additional protections, allowing you to exempt ERISA account assets from your bankruptcy estate.
- Traditional and Roth IRA assets can be exempted from your bankruptcy estate, up to $1,362,800 (as of 2021).
- While ERISA protects employer-sponsored retirement plans from creditors, the exception is the IRS.
Protection Against General Creditors
Retirement plans set up under the Employee Retirement Income Security Act (ERISA) are for the most part protected from creditors, bankruptcy proceedings, and court judgments. ERISA plans are set up with your employer and include 401(k) plans, pension plans, SIMPLE IRAs, Simplified Employee Plans (SEPs), employee stock ownership plans, and profit-sharing plans.
ERISA accounts are afforded additional bankruptcy protections under the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). If you enter bankruptcy proceedings, you can exempt ERISA-qualified account assets from your bankruptcy estate.
Traditional or Roth IRA accounts are protected from creditors only in a bankruptcy proceeding. BAPCPA allows you to exempt up to $1,000,000 in IRA assets from your bankruptcy estate. This protection applies to the sum of your IRA accounts, not each account in isolation. The dollar value is adjusted every three years. As of 2021, the exemption amount is $1,362,800. In addition, these exemption limits do not apply to retirement funds rolled over from an ERISA account into an IRA.
Some states have opted out of federal bankruptcy protections and use their own laws to determine bankruptcy exemptions. Nevertheless, BAPCPA protects your retirement assets even if you live in one of these states.
No Protection Against the Feds
While ERISA protects retirement accounts from most creditors, this doesn't apply to the Internal Revenue Service (IRS). This means the federal government can seize your 401(k) or pension plan assets to enforce a federal tax levy or collect on a judgment resulting from an unpaid tax assessment. In addition, these assets can be given to an ex-spouse to satisfy a qualified domestic relations order.
The anti-alienation clause under ERISA prevents other types of creditors from gaining access to your employer-sponsored retirement accounts. Under ERISA, these funds are held by the plan administrator for your benefit, and you are not free to sell, transfer, or give away your rights to them. The funds belong to you once you withdraw them as income. Until then, they are the property of the plan administrator—your employer—who cannot release them to anyone but you.
Some states have opted out of federal bankruptcy protections, but federal bankruptcy rules protect your retirement assets even if you live in one of those states.
What You Can Do
Money held in qualified retirement plans such as 401(k)s and pension plans are for the most part protected from creditors, while traditional and Roth IRAs are protected under federal bankruptcy law. To ensure that a rollover from a qualified retirement plan into an IRA receives full exemption in a bankruptcy proceeding, it helps to create a separate account just for those assets.