Most investors understand the significant tax benefits of using their qualified retirement accounts — such as their 401(k)s, IRAs and Roth IRAs — to build long-term wealth. But did you know that these types of accounts also provide creditor protection?
One of the lesser-known benefits of retirement accounts is this — Federal statues offer retirement accounts special treatment when subject to the claims of creditors. This creditor protection can be a valuable tool in the event of a legal liability, personal injury lawsuit, or bankruptcy. Accounts that receive special protection include 401(k) plans, pension plans, profit sharing accounts, SEP IRAs, SIMPLE IRAs, 403(b) plans, 457 plans, traditional IRAs, and Roth IRAs.
It is important to understand how federal and state laws affect these rights. Each type of qualified retirement account is subject to a specific jurisdiction and offers varying degrees of security.
Account protection from creditors
Employer-sponsored retirement accounts — such as 401(k)s, pension plans, and profit sharing accounts — are governed by federal laws outlined by the Employee Retirement Income Security Act of 1974 (“ERISA”).¹ These types of plans have unlimited protection in the event of bankruptcy and other legal liability. Most 403(b) and 457 plans also provide the same unlimited protection.
Employer-sponsored IRA accounts — such as SEP IRAs and SIMPLE IRAs — have unlimited protection for bankruptcy under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”),² while state laws define the how non-bankruptcy liabilities are handled.
Traditional IRAs and Roth IRAs are protected for bankruptcy up to $1,512,350³ under this Actas of 2022. (This protection limit is updated every three years, so will be updated sometime in 2025.) Again, state laws dictate the rules for non-bankruptcy liabilities.
Note that the creditor protection offered for both ERISA plans and IRA-based accounts are only available in the event of bankruptcy and certain legal liabilities. They do not apply to an ex-spouse’s claim pursuant to a divorce proceeding, taxes and penalties due to the Internal Revenue Service, federal criminal fines, or wrongdoing against the retirement plan itself.
Quick reference guide
| Type of Account | Bankruptcy protection | Legal liability protection |
| 401(k)s | Unlimited protection1 | Unlimited protection1 |
| Pension plans | Unlimited protection1 | Unlimited protection1 |
| Profit sharing accounts | Unlimited protection1 | Unlimited protection1 |
| SEP IRAs | Unlimited protection2 | Regulated by state |
| SIMPLE IRAs | Unlimited protection2 | Regulated by state |
| 403(b) plans | Unlimited protection1 | Unlimited protection1 |
| 457 plans | Unlimited protection1 | Unlimited protection1 |
| Traditional IRAs | Aggregate protection up to $1,512,350 (2022)2 | Regulated by state |
| Roth IRAs | Aggregate protection up to $1,512,350 (2022)2 | Regulated by state |
1. Based on ERISA guidelines | 2. Based on BAPCPA guidelines
Account withdrawal protection from creditors
Furthermore, withdrawals from an ERISA retirement plan can retain an enhanced level of creditor protection depending on the destination of the withdrawal:
- Funds deposited to another employer’s ERISA plan maintain unlimited protection for both bankruptcy and legal liability.
- Funds deposited to an IRA account consisting solely of rollover funds maintain unlimited protection for bankruptcy, but not for legal liability (this is determined by state laws).
- Funds deposited to an IRA account which includes non-ERISA contributions (a “comingled” IRA) are protected for bankruptcy up to the $1,512,350 until March 31, 2025. Legal liability is subject to state laws.
- Funds withdrawn as cash distributions are no longer protected against claims.
Each state has its own regulations for dealing with non-bankruptcy claims. For example, Illinois law provides unlimited protection against legal liability for traditional IRAs and Roth IRAs (as well as for any qualified retirement account not covered by ERISA). Be aware that most states do not endow “inherited IRAs” with creditor protection.
Understanding exactly which assets are protected from specific types of creditors — and which are not — is a critical component to the construction and maintenance of your comprehensive financial plan. It is important to remember that the concepts above are guidelines based on current laws, which of course, can change over time, and that every individual’s financial planning needs are unique. If you have any questions about how your specific retirement accounts are impacted, please contact your wealth advisor.
Published January 2024
1. Employee Retirement Income Security Act of 1974 (ERISA).
2. Bankruptcy Abuse Prevention and Consumer Protection Act of 2005
3.https://www.thebankruptcysite.org/exemptions/federal.html
FAQs
In general, retirement plans that are covered by ERISA are protected from creditors—and their lawsuits. A 401(k) is an ERISA-qualified plan, so it is likely protected if you get sued. There may be a few exceptions, such as charges brought by the federal government or if you allegedly wronged the plan.
Are retirement accounts protected from creditors? ›
Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, IRAs and most other retirement accounts are protected from creditors, even if the account holder declares bankruptcy.
Can debt collectors go after retirement accounts? ›
If a creditor gets a judgment against you and you have a retirement account, then the judgment creditor may be able to seize all or part of the account. This will depend on whether your account is an ERISA-qualified retirement account or a non-ERISA account.
What type of accounts are protected from creditors? ›
Quick reference guide
| Type of Account | Bankruptcy protection | Legal liability protection |
|---|
| 401(k)s | Unlimited protection1 | Unlimited protection1 |
| Pension plans | Unlimited protection1 | Unlimited protection1 |
| Profit sharing accounts | Unlimited protection1 | Unlimited protection1 |
| SEP IRAs | Unlimited protection2 | Regulated by state |
5 more rowsMoney saved in a qualified retirement account, such as a 401(k) plan, is typically protected from private creditors as long as the money remains within the account. The IRS, however, may come after retirement funds to pay back taxes or other federal obligations.
Can creditors go after retirement accounts after death? ›
Creditors cannot go after your 401(k) when you die. Your executor will settle debts out of your estate but not your 401(k) unless you didn't name any beneficiaries.
Can creditors garnish your retirement? ›
Are such assets safe from creditors who may seek to garnish or seize your retirement benefits? The answer is that your assets held in retirement plans are generally safe from creditors, even if you are involved in a bankruptcy action.
Why should seniors not worry about old debts? ›
Many seniors are “judgment proof,” which means their income is derived from retirement, Social Security, or other accounts that can't be garnished. Debt collectors may not bother to take seniors in this situation to court, since they're unlikely to get the money that way.
What type of bank account cannot be garnished? ›
Some sources of income are considered protected in account garnishment, including: Social Security, and other government benefits or payments. Funds received for child support or alimony (spousal support) Workers' compensation payments.
Can debt collectors take money from your bank account without permission? ›
Debt collectors, though persistent, cannot simply withdraw money from your account without a court-ordered bank levy, which is typically a last resort. The FDCPA provides protections for consumers, with avenues for recourse if these are violated.
In California, these accounts are protected only up to the amount necessary to provide reasonable support for you, your spouse, and your dependents upon retirement (all assets and accounts will be taken into consideration before exposing an IRA).
What is the strongest asset protection? ›
Trusts are one of the strongest asset protection tools you can use. They can protect your assets from creditors, legal claims, and anything else threatening your estate or business. A trust is defined as an agreement that allows a third party to withhold assets on behalf of the beneficiary.
Can debt collectors see your bank account balance? ›
Collection agencies can access your bank account, but only after a court judgment. A judgment, which typically follows a lawsuit, may permit a bank account or wage garnishment, meaning the collector can take money directly out of your account or from your wages to pay off your debt.
How to protect retirement accounts from creditors? ›
In general, retirement plans that are covered by ERISA are protected from creditors—and their lawsuits. A 401(k) is an ERISA-qualified plan, so it is likely protected if you get sued. There may be a few exceptions, such as charges brought by the federal government or if you allegedly wronged the plan.
Can debt collectors go after your retirement? ›
Under the Employee Retirement Income Security Act (ERISA), creditors are generally not able to seize funds from pensions and employer-sponsored retirement accounts. Creditors may target funds in traditional and Roth IRAs and certain 403(b) plans, which are typically not protected under ERISA.
Are inherited 401k protected from creditors? ›
The Bankruptcy Court made it clear that bankruptcy protection for inherited 401(k) funds applies only if the bankruptcy filing occurs before the account is distributed. If the funds are paid out before the filing, they become part of the bankruptcy estate and will be exposed to creditors.
How do I protect my retirement assets from a lawsuit? ›
You may be able to reduce the risk to your personal assets in a lawsuit if you increase your insurance coverage, structure and insure your business as a separate entity, and consider using an irrevocable trust to hold your assets.
Are retirement accounts guaranteed? ›
The benefits in most cash balance plans, as in most traditional defined benefit plans, are protected, within certain limitations, by federal insurance provided through the Pension Benefit Guaranty Corporation (PBGC) .
What states protect IRA from creditors? ›
The safest states to live in for protecting IRA funds include Arizona, Texas, and Washington. Arizona state laws only allow the judgment creditor to seek retirement funds during bankruptcy from the last 120 days of contributions, meaning everything prior has 100% legal protection.
Can creditors go after investment accounts? ›
Creditors can come after your assets if they're granted a judgment to do so in court. While 401(k) plans are generally protected from creditors, the same isn't true for IRAs. If you have access to a 401(k) plan through work, it pays to use it -- especially if you qualify for matching contributions from your employer.
