Can Creditors Go After My Retirement Accounts?

Highlights:

• Retirement accounts are specialized investment accounts, usually with unique tax benefits, that help workers build a source of income for their retirement years.
• 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.

Working toward a comfortable retirement takes years of hard work and saving. If you're facing financial hardship, you may worry about creditors undoing this hard work by targeting your retirement funds.

What is a retirement account?

Retirement accounts are specialized investment accounts, usually with unique tax benefits, that help workers build a source of income for their retirement years.

There are many types of retirement accounts, including 401(k)s, IRAs and 403(b)s. Each has its own unique features, benefits and drawbacks. But they almost all follow the same basic concept. Account holders make periodic contributions to their savings. Once this money is in the account, it is invested into various stocks, bonds and other assets. Ideally, these investments will increase in value over the years.

When it comes to saving for retirement, patience is key and the earlier you can start saving, the better. It's important to make regular contributions and leave the funds undisturbed for as long as possible.

What is the Employee Retirement Income Security Act?

If you've fallen behind on paying a debt, can creditors go after the money in your retirement accounts? The answer depends on whether the account is qualified or non-qualified under the Employee Retirement Income Security Act (ERISA).

ERISA is a federal law that regulates certain types of retirement accounts. It sets legal standards that help protect retirement account holders from dishonest practices. It also helps block most asset seizures by creditors.

ERISA doesn't cover all retirement accounts. Here's how to spot the difference between qualified and non-qualified retirement plans.

Qualified retirement accounts

In most cases, ERISA offers protection from creditors for these retirement accounts:

• Defined benefit plans. These include employee pensions, which provide a fixed monthly benefit once an employee retires.
• Defined contribution plans. These are funded by fixed contributions taken from an employee's paycheck. Most employer-sponsored retirement plans, such as traditional and Roth 401(k) plans and certain 403(b) plans fall into this category.

ERISA-qualified accounts are typically off limits to your creditors, and there's generally no cap on protected funds. Whether you have $100 in the account or $1 million, creditors are not allowed to access any money kept in your ERISA-qualified plans.

However, there are some exceptions to this rule. If you have an ERISA-qualified retirement account, some or all of your money may be claimed as a part of a court order relating to divorce, child support or other civil judgments. The federal government can also seize your qualified retirement account to pay criminal penalties and delinquent federal taxes.

Non-qualified retirement accounts

Plans that do not have defined benefits or contributions are not afforded the same legal protections under ERISA. These non-qualified retirement accounts include traditional and Roth IRAs. They may also include certain types of 403(b)s offered by governments and churches. Whether creditors can go after these accounts varies by state. So, if you're worried about creditors targeting your IRA, be sure to review the laws for your area.

However, if you declare bankruptcy, up to $1 million of any non-qualified retirement account may be shielded from seizure. This is part of a federal law known as the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). Certain transactions — such as borrowing money from your account or using it to secure a loan — may nullify the account's BAPCPA protections or even threaten its tax-qualified status.

Before you take action regarding your retirement accounts, review applicable state and federal laws. Consult with a financial professional who can help you make informed decisions about your retirement.