Though some states protect IRA savings from garnishment of any kind, most states lift this exemption in cases where the account owner owes child support.
Unlike 401(k) plans or other qualified retirement savings accounts covered under the Employee Retirement Income Security Act of 1974 (ERISA), individually owned IRA accounts are not automatically protected from garnishment by creditors. If you are court-ordered to fulfill a debt, including the payment of overdue child support, your IRA counts as an asset that may be used to satisfy that debt. Though there are some situations in which your IRA may be exempt from garnishment, failure to pay child support is generally not among them.
The degree to which IRAs are protected from garnishment is determined largely by state governments. The federal government does have its system of exemptions, but states are allowed to choose between adhering to federal regulations or creating their systems.
Most states choose to develop their systems of exemptions, meaning that the specific protections offered can vary greatly depending on your state of residence.
- Individual IRAs, which are not governed by ERISA, are not exempt from court-ordered garnishments.
- States can employ the U.S. federal government's system of exemptions or create their own.
- Under bankruptcy, individuals may have up to $1 million of protection for their IRA under the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) if permitted by their state.
- Most states offer no exemptions to absolve IRA holders of their child support obligations.
Under federal law, there is no protection for IRA funds except in the case of bankruptcy. The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005 protects up to $1 million of your IRA savings if you declare bankruptcy.
However, states have the final say in what bankruptcy regulations apply to their residents. This means that the BAPCPA $1 million exemption only applies if your state of residence allows you to choose between the state-specific exemption system and the federal exemption system. In some states, residents do not have a choice between state and federal exemptions.
Aside from this partial bankruptcy exemption, IRAs can be garnished to fulfill any federal debt, including debts to the IRS for overdue taxes.
Most states offer some form of limited protection for IRAs. In the event of bankruptcy, for example, many states exempt any IRA funds deposited more than 120 days before a bankruptcy filing. In Minnesota, only IRA funds over $30,000 may be garnished to satisfy creditors. Your IRA funds may also be exempt from garnishment to the extent that they are necessary to support you and your dependents, though some states cap the maximum amount of IRA funds that can be considered "necessary."
Though several possible exemptions protect your IRA from creditors, many states lift these exemptions in the case of domestic relations judgments. Garnishment to satisfy child support obligations is the most common exception to these protections. In many states—including Kentucky, Colorado, Wisconsin, and Louisiana—IRAs are offered no protection from collections related to overdue child support. Judgments relating to alimony, divorce, annulment, or legal separation are also common exceptions to state exemption laws.
Kansas, Connecticut, Illinois, and New Jersey are a few of the states that offer blanket protection for IRA retirement savings. In these states, your IRA cannot be garnished for any reason, even if you owe overdue child support.