Can Creditors Go After My Retirement Accounts?

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If you owe a substantial amount of money or have filed for bankruptcy, you might be worried about creditors going after your retirement funds. Regardless of your financial situation, here is some essential information about what are known as qualified and non-qualified retirement accounts.

Qualified retirement accounts

Retirement accounts set up under the Employee Retirement Income Security Act (ERISA) of 1974 are generally protected from seizure by creditors. ERISA covers most employer-sponsored retirement plans, including 401(k) plans, pension plans and some 403(b) plans. Even if you have accumulated millions of dollars in your retirement account and owe money or have filed for bankruptcy, creditors cannot access funds in these ERISA-qualified plans.

Under ERISA, there’s generally no cap on protected funds. However, there are some instances when money in an ERISA-qualified account may not be protected from creditors. If you are found guilty of a crime and go to prison, for example, the state could garnish those funds to compensate the prison for some of their costs. Your retirement savings might also not be protected if the creditor is a former spouse or the IRS.

Non-qualified retirement accounts

Individual retirement accounts (IRAs), including Roth IRAs, are not protected by the federal government under ERISA. The only exception is in the case of bankruptcy.

The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005 gives federal protection to IRAs up to $1 million (though money rolled over from an ERISA-qualified plan into an individual account may not be subject to these limits). However, you can lose those protections and the account’s tax-qualified status if you use your IRA for a prohibited transaction, such as pledging it as security for a loan or borrowing from it.

Outside of bankruptcy, state laws determine whether the money in a non-qualified account is protected from creditors. In Michigan, for example, the first $1 million in an IRA is protected from creditors, but inherited IRAs are not protected.

The rules around qualified and non-qualified accounts can be confusing. Check your state’s laws and consider working with an attorney or financial planner to be sure you’re taking the right steps.

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