As long as your retirement funds are held in your 401(k) and you do not take them as distributions, your 401(k) cannot be seized or garnished by commercial creditors. However, this exemption does not protect your savings in certain situations, such as judgments relating to unpaid federal income taxes.
Because employer-sponsored 401(k) plans are considered qualified savings vehicles, they fall under the Employment Retirement Income Security Act of 1974 (ERISA). In addition to outlining the basic requirements of running an employer-sponsored retirement plans, ERISA's anti-alienation clause provides broad protection for retirement savings in many situations.
The anti-alienation provision states that funds deposited in a qualified retirement plan are held by the plan administrator for the benefits of plan participants, and participants cannot freely sell or transfer them. Your retirement savings are not legally your personal assets until you withdraw them as income after retirement. Only your own personal assets can be used to satisfy your personal debts.
This ERISA protection means that even if you file for bankruptcy, your 401(k) savings are completely shielded from garnishment. The same cannot be said for individually held IRA accounts. Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, only the first $1 million of your IRA savings is exempt from garnishment in the event of bankruptcy.
What About Taxes?
Though your 401(k) is protected from commercial creditors, it is not exempt from garnishment or seizure if you owe federal income taxes in arrears. In general, if you are eligible to take a distribution from your 401(k), the IRS can seize it to settle your debt. However, if you are not allowed to take distributions from your account due to age or other plan restrictions, the IRS cannot override these regulations.
In general, your 401(k) is safe in cases of overdue state or local taxes.
Other Federal Garnishment
Though less common than overdue taxes, there is one other case in which the federal government or other creditors can potentially seize or garnish your 401(k).
If you have committed a federal crime and are ordered to pay fines or penalties, you may be required to withdraw from your retirement savings to satisfy the debt. In addition, you may be ordered to withdraw from your plan if you are found, in a civil or criminal judgment, to have mishandled your plan or committed fraud.
Though ERISA governs the majority of the regulations pertaining to 401(k) savings plans, these regulations are broad and don't cover every scenario. While your 401(k) is protected from most commercial and professional creditors, the laws of your state of residence must fill in the gaps. This means that, to some degree, your state dictates the situations in which your 401(k) is protected from seizure, though ERISA regulations supersede any conflicting state law.
The most common state laws lifting the protection for 401(k) savings pertain to domestic relations judgments. If you owe unpaid child support or alimony, you may be court-ordered to withdraw funds from your 401(k) to settle the debt. If you divorce, your spouse may be entitled to a portion of your account. However, state laws vary widely. Though some states provided blanket protection for all retirement savings vehicles, others are less generous.
Donald P. Gould
Gould Asset Management, Claremont, CA
The general answer is no, a creditor cannot seize or garnish your 401(k) assets. 401(k) plans are governed by a federal law known as ERISA (Employee Retirement Income Security Act of 1974). Assets in plans that fall under ERISA are protected from creditors. One exception is federal tax liens; the IRS can attach your 401(k) assets if you fail to pay taxes owed. IRAs do not fall under ERISA, but do provide some degree of creditor protection. In general, the first $1 million in IRA assets is protected against a bankruptcy claim. Individual state law may provide additional protection beyond this.