Federal law protects pension plans and 401(k) accounts from creditors and bankruptcy. No matter the size of your debts, your account is safe. With IRAs, you get some protection, but it isn't airtight. Your IRA's security depends on the nature of the threat -- bankruptcy or creditor lawsuit, for example -- and where you live.
The federal government does offer your IRA some protection. If you file Chapter 7 bankruptcy, the bankruptcy court can sell off many of your assets to pay your creditors. Federal law says the court can't touch your IRA if it's $1 million or less. If you're lucky enough to have a bigger IRA, everything over the $1 million mark is up for grabs. If you rolled over your workplace retirement account into an IRA, however, all that money is completely protected, even above a million.
If your creditor has sued to get a judgment against you, it's up to your state how safe your IRA is. In some states, such as New York, the account is 100 percent secure against creditor lawsuits. California, on the other hand, only exempts what you need to support yourself. If, say, you're young with a good job and years ahead to rebuild your account, the judge may decide your creditor needs the money more than you do. 401(k) rollover IRAs may also be vulnerable to judgments.
State laws vary on whether money you've withdrawn from an IRA is protected from creditors like money in the account. Your protection may also disappear if you live in one state but keep retirement assets in another. Florida, for instance, provides state residents' IRAs with unlimited judgment-protection, but only if the account is in a Florida institution. If, say, you move to Florida from California and leave your IRA in a California bank, Florida law isn't going to help you.
IRA owners get an exemption so that they'll have money to retire on. If you inherit an IRA, some states and bankruptcy courts hold that it's not really retirement money, so your creditors are free to come after it. Spouses who inherit retirement accounts have the best chance to exempt it, as they can treat the account as if it were their own. With other beneficiaries, it may come down, again, to where you live.
- New York Times: Protecting Retirement Assets From Creditors
- Wall Street Journal: How to Protect 401(k)s and IRAs From Creditors
- Nolo: Are My Retirement Accounts Protected From Judgment Creditors in California?
- Alper Law: Statutory Exemptions
- Thomson Reuters: Seventh Circuit Creates Split Over Exemption for Inherited IRAs
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- How Is a Joint Bank Account Split Equitably in a Divorce?
- Do You Have to Pay Federal Tax on an IRA Disbursement From a Deceased Relative?