Whether your individual retirement account (IRA) can be taken in a lawsuit depends largely on your state of residence and the judgment in question. There are no federal protections in place shielding your IRA from seizure in a lawsuit.
- If you are sued, creditors may be able to access your retirement savings if you are required to pay a settlement.
- State protections for IRA funds in a lawsuit vary considerably among the 50 states.
- Exemptions for traditional IRAs and Roth IRAs are often different.
- In the case of domestic relations lawsuits, IRA funds are almost never protected.
When Is Your IRA in Danger?
If you are served with a lawsuit, your IRA retirement savings may be in danger. If someone falls and is injured on your property or you are involved in a car accident, you may find yourself on the losing end of a court order. In some cases, you might be legally required to dip into your retirement savings to satisfy the debt if you are unable to pay using other assets. Other issues that may result in lawsuits that endanger your IRA include credit card or loan default, divorce, and parental rights disputes.
Federal Exemptions, or Lack Thereof
Unlike 401(k) retirement plans and other savings schemes covered under the Employee Retirement Income Security Act of 1974, individually held IRAs are not offered blanket protection from creditors under federal law. In fact, the only guaranteed federal protection provided for your IRA is a partial exemption in the case of bankruptcy.
If you declare bankruptcy, a substantial amount of IRA assets are protected under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. In April 2019, the protected amount, which is adjusted every three years for inflation, was recalculated at $1,362,800.
The only federal protection for funds from an IRA in a legal proceeding is a partial exemption in bankruptcy cases.
Aside from this protection, the federal government does not shelter IRA funds from confiscation. In the case of federal debts, such as unpaid taxes due to the IRS, your IRA can be seized or garnished to satisfy the debt, just as with any other asset. All other potential exemptions are at the discretion of state governments, so specific laws can vary widely.
Exemptions vary significantly among the states. Many provide IRAs with blanket protection from creditors, regardless of the debt. However, some only provide protection for IRA funds deemed to be necessary to support you and your family.
Also, many states impose a limit on the amount of IRA funds that can qualify for this exemption. Others provide full protection for IRA funds deposited before a certain number of days before the judgment. In Hawaii, any funds you contribute at least three years before a judgment against you are protected from seizure. In Utah, all contributions made at least one year prior are protected.
Never a Straight Answer
Even within a single state’s code, the specific exemptions for traditional IRAs may differ from those for Roth accounts. Funds that remain in your IRA untouched may be afforded greater protection than funds taken as a distribution.
The bottom line is this: If you are in danger of being sued, review the specific laws applicable to your state and account type to avoid forfeiture of your retirement savings.
Domestic Relations Lawsuits
Even in states with generous exemption systems, IRA protections are lifted in cases of judgments relating to child support, alimony, or other domestic relations. If you are served with a lawsuit because of unpaid child support, for example, it is unlikely your IRA is protected, regardless of where you live.