You can take money from your IRA to pay your debts, but that doesn't mean your creditors can force you. Federal and state laws protect your IRA, but the protection varies with your circumstances and which state you call home. In some cases, even if IRA assets are safe, your withdrawals aren't.
If you're so deep in debt you have to file bankruptcy, federal law is pretty good to your IRA. As long as your assets stay in the account, you can shield up to $1.1 million -- as of 2012 -- from your creditors. Withdrawals are different: If you file Chapter 7, the bankruptcy court will seize any withdrawals you don't need for support. In Chapter 13, where you pay off as much debt as possible over three or five years, the court uses your withdrawals to determine how much you can pay back.
If you're not in bankruptcy, federal law doesn't protect your IRA assets. State law may. New York and North Carolina protect everything in your account from creditors. Nevada shields $500,000 of IRA assets. California protects whatever is "reasonable and necessary" for you to support yourself, based on how old you are and what other assets you have. If your 401(k) is substantial, for instance, a California court may decide keeping your IRA isn't "necessary." States also differ on what protection withdrawals receive.
If you inherit an IRA, that's great news -- unless your creditors get the money instead. The chance of that happening, as of 2012, depends once again on geography. District courts around the country have ruled that creditors cannot touch an inherited IRA. Other courts have ruled that your creditors are free to lay claim to the account assets. Those judges see an inherited IRA as less a retirement asset and more like a financial windfall, not deserving of protection.
Your state law may protect your entire IRA, unless you're really well set up for retirement. If you do think the account is vulnerable, consider investing more in your 401(k), which is 100 percent protected from creditors. If you inherit an IRA and you're at risk for creditor lawsuits, you can disclaim the account, letting it pass to an alternative beneficiary, if there is one. Legally, you never own the assets so there's nothing for creditors to seize.
- Wall Street Journal: How to Protect 401(k)s and IRAs From Creditors
- Nolo: Your Retirement Plan in Bankruptcy
- New York Times: Protecting Retirement Accounts From Creditors
- Bryan Cave: Are Inherited IRAs Protected From Creditors in Bankruptcy?
- National Law Review: Inherited IRAs Can Be Reached by Creditors to Pay Debts
- Fidelity: Inherited IRA