Are Your Retirement Accounts Protected from Creditors?

By Ian Berger, JD
IRA Analyst
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One question that continues to come up is whether company retirement plan dollars are protected from creditors. This becomes an issue if you are forced to declare bankruptcy or you owe money after a legal action is brought against you.

If you’re in a plan covered by ERISA (the Employee Retirement Income Security Act), you don’t have much to worry about. Your plan account is just about completely shielded from creditors – whether or not you’ve declared bankruptcy. [There are exceptions for QDRO (qualified domestic relations order) payments to ex-spouses and IRS levies to recover unpaid taxes.]

Even if your plan is not an ERISA plan, your funds are still safe if you’re in bankruptcy. That protection comes from the federal Bankruptcy Code. But the situation may be different if you owe money from a non-bankruptcy lawsuit. In that case, your ability to shield your plan dollars depends on the law of the state where you live. Although some states offer complete protection similar to federal law, the protection in other states is not as strong.

Sometimes it’s hard to know whether you’re covered by an ERISA plan. Here are some guidelines.

ERISA plans include:

• Most retirement plans sponsored by for-profit companies, including most 401(k) plans and defined benefit pension plans.
• 403(b) plans sponsored by not-for-profit companies (such as hospitals) if the company makes contributions to the plan.

ERISA plans don’t include:

• Plans with no employees other than the owner (and the owner’s spouse), such as a solo 401(k).
• 403(b) plans sponsored by not-for-profit companies (such as hospitals) if the company doesn’t make contributions to the plan and its only involvement is administering employee deferrals.
• Plans sponsored by governments or churches. These include the Thrift Savings Plan, which is a 401(k)-type plan for federal workers and the military. It also includes 403(b) plans for teachers or church employees and 457(b) plans for state and local municipal workers.
• SEP and SIMPLE IRAs.

If you’re still not sure whether you’re in an ERISA plan, check your written plan summary or contact your HR rep.

What about IRAs? Your traditional and Roth IRAs are safe from creditors if you declare bankruptcy – but only up to an inflation-adjusted dollar limit (currently, $1,362,800). Since funds rolled over to IRAs from employer plans don’t count towards that limit, just about everyone should be well below that threshold. But outside of bankruptcy, your IRAs only receive whatever protection your state allows.