Depending on the state where you live, your IRA may be garnished by a number of creditors. Unlike 401(k) plans or other qualified retirement savings vehicles, individually established traditional or Roth IRAs are not covered under ERISA. While employer-sponsored retirement plans are 100% protected from creditors, individual IRA accounts are not granted the same protection.
Other than a partial exemption for bankruptcy, there are no federally mandated exemptions from IRA garnishment. Therefore, your retirement savings can be garnished to satisfy any federal debts. The most common federal debt satisfied by the seizure of IRA funds is back taxes owed to the IRS.
There is some federal protection for your IRA if you declare bankruptcy. However, an unlimited protection encourages those in danger of bankruptcy to put all their money into an IRA to avoid paying creditors. To prevent this abuse, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 limits the IRA exemption to $1 million, which is still a tidy sum.
States can choose to adhere to the federal exemption system or create their own, so specific exemptions for IRA garnishment can vary widely by state. Aside from the IRS or other federal creditors, states can restrict any and all creditor access to IRA funds. In some states, such as New York and New Jersey, IRAs are fully exempt from any nonfederal garnishment.
In many other states, IRAs are exempt under certain conditions. One common requirement is the exemption only applies to funds deposited more than 120 days prior to bankruptcy declaration. Another exemption applies to the amount of your IRA deemed necessary to support you, your spouse and your dependents. Some states impose a cap on this amount, while others do not. In most states, there is also no protection for IRA funds if the account owner owes money in relation to a judgment pertaining to domestic relations debt.
Domestic Relations Debts
There are a number of domestic relations debts that may result in IRA garnishment depending on your state. Child support is one of the most common causes of permissible IRA seizure. In many states, including Kentucky, Colorado and Louisiana, IRA funds are provided no protection from court judgments in relation to overdue child support or maintenance.
In other states, your IRA may also be garnished to satisfy other types of domestic relations judgments. In addition to child support arrears, Kentucky, Louisiana and Rhode Island also allow garnishment to fulfill alimony requirements. Wisconsin allows for the seizure of IRA funds to fulfill court orders related to marriage annulment or divorce.
Early Withdrawal Penalty Exemption
Any distributions taken from your IRA before you reach age 59.5 are usually subject to a 10% tax penalty. Unfortunately, this also applies to any amount withdrawn to satisfy creditors before you reach retirement age. However, if your IRA is garnished to satisfy a debt to the IRS, the penalty is waived.
(For related reading, see "Can Student Loans Garnish My Bank Account?")