If your creditors can't get you to write them a check, garnishing your money is an alternative way to get the cash. Once they obtain a court order confirming the debt, creditors can target your bank account, your wages or possibly an investment plan such as an Individual Retirement Account. State and federal laws protect some investment accounts, but not all.
If you set up your investment account through your job -- a 401(k) or 403(b0 account, for instance -- the federal Employee Retirement Income Security Act (ERISA) protects it from garnishment. There is a possible exception, however: The federal Mandatory Victims Restitution Act (MVRA) requires that criminals make full restitution to their victims in various types of property-damage or personal injury cases. Some federal courts have ruled that if restitution requires garnishing a retirement account, MVRA trumps ERISA.
Unlike a workplace 401(k), traditional and Roth IRAs are personal investment vehicles, set up independently of your job. As a result, they're not covered by ERISA, and neither is the Keogh investment account for self-employed professionals. Some states protect IRAs and Keoghs, but if your state doesn't, your account is vulnerable to any creditor with a court judgment. In some states, creditors can collect on their debt by garnishing a percentage of the money you deposit into your IRA each paycheck.
Simplified Employment Plans (SEP) and Simple IRAs are low-cost employment investment plans that let your employer set up IRAs for you and your coworkers to contribute to. Even though ERISA governs these plans, it exempts them from the garnishment protection 401(k) accounts receive. At the same time, because SEPs and Simple IRAs are covered by ERISA, that prevents states from laying down laws protecting them. As a result, SEPs and Simple IRAs are vulnerable to garnishment.
If you have an IRA, the law that applies is that of whichever state you live in. Even if your creditor comes from a state that protects IRAs, that doesn't help if you're a resident of a state that doesn't. If you live in an IRA-protecting state and subsequently move to a state without protection, your IRA becomes vulnerable. Your state of residence may not be the state you live in: If you're stationed at a military base in Georgia, for example, but you plan to return to your Ohio home, you're still considered an Ohio resident.
- William McDaniel: Protecting Your Retirement Assets
- National Criminal Justice Service: Restitution
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- Nolo: Collecting From a Judgment Debtor: Wage Garnishment, Property Liens, and Bank Account Levys
- Nolo: Personal Jurisdiction: In Which Court Can I Sue the Defendant?
- Hill Air Force Base: Legal Residence
- Are Roth Accounts Protected From Bankruptcy?
- Is a Bank Account Garnishment the Joint Account Holder's Responsibility?
- Are Withdrawals From a 457(b) Private Subject to Early Withdrawal Penalty?
- Can an IRA Be Lost to a Suit?
- Can More Than One Person Be Named on an IRA Account?
- Can a Creditor Put a Lien on a CD Account?
- Can I Claim a 414 Retirement Plan on My Federal Taxes?
- Traditional IRA vs. SEP