Whether your individual retirement account (IRA) can be taken in a lawsuit depends largely on your state of residence and the judgment in question. There are no federal protections in place shielding your IRA from seizure in a lawsuit.
Key Takeaways
- If you are sued, creditors may be able to access your retirement savings if you are required to pay a settlement.
- State protections for IRA funds in a lawsuit vary considerably among the 50 states.
- Exemptions for traditional IRAs and Roth IRAs are often different.
- In the case of domestic relations lawsuits, IRA funds are almost never protected.
When Is Your IRA in Danger?
If you are served with a lawsuit, your IRA retirement savings may be in danger. If someone falls and is injured on your property or you are involved in a car accident, you may find yourself on the losing end of a court order. In some cases, you might be legally required to dip into your retirement savings to satisfy the debt if you are unable to pay using other assets.
Other issues that may result in lawsuits that endanger your IRA include credit card or loan default, divorce, and parental rights disputes.
Federal Exemptions, or Lack Thereof
Unlike 401(k) retirement plans and other savings schemes covered under the Employee Retirement Income Security Act of 1974, individually held IRAs are not offered blanket protection from creditors under federal law. In fact, the only guaranteed federal protection provided for your IRA is a partial exemption in the case of bankruptcy.
If you declare bankruptcy, a substantial amount of IRA assets are protected under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. In Feb. 2022, the protected amount, which is adjusted every three years for inflation, was recalculated at $1,512,350.
The only federal protection for funds from an IRA in a legal proceeding is a partial exemption in bankruptcy cases.
Aside from this protection, the federal government does not shelter IRA funds from confiscation. In the case of federal debts, such as unpaid taxes due to the IRS, your IRA can be seized or garnished to satisfy the debt, just as with any other asset. All other potential exemptions are at the discretion of state governments, so specific laws can vary widely.
State Exemptions
Exemptions vary significantly among the states. Many provide IRAs with blanket protection from creditors, regardless of the debt. However, some only provide protection for IRA funds deemed to be necessary to support you and your family.
Also, many states impose a limit on the amount of IRA funds that can qualify for this exemption. Others provide full protection for IRA funds deposited a certain number of days before the judgment. In Hawaii, any funds you contribute at least three years before a judgment against you are protected from seizure. In Utah, all contributions made at least one year prior are protected.
Never a Straight Answer
Even within a single state’s code, the specific exemptions for traditional IRAs may differ from those for Roth accounts. Funds that remain in your IRA untouched may be afforded greater protection than funds taken as a distribution.
The bottom line is this: If you are in danger of being sued, review the specific laws applicable to your state and account type to avoid forfeiture of your retirement savings.
If funds from a 401K are rolled into an IRA, that money becomes protected from lawsuits.
Domestic Relations Lawsuits
Even in states with generous exemption systems, IRA protections are lifted in cases of judgments relating to child support, alimony, or other domestic relations. If you are served with a lawsuit because of unpaid child support, for example, it is unlikely your IRA is protected, regardless of where you live.
FAQs
Similarly, if you are sued in civil or criminal court and are found guilty or liable, money in your IRA could be used to pay damages and court fees. This isn't universally true, fortunately. In fact, whether or not your IRA money is safe from creditors and lawsuits depends on your state of residence.
How do I protect my retirement assets from a lawsuit? ›
This is excellent news for the majority of Americans, as it turns out that one of the most effective ways to protect assets is to shield them in retirement accounts. Individual retirement accounts, 401(k)s, and other types of tax-efficient plans can help you prevent the loss of your assets in case of a lawsuit.
Can my IRA be garnished? ›
Other than a partial exemption for bankruptcy, there are no federally mandated exemptions from IRA garnishment. 4 Therefore, your retirement savings can be garnished to satisfy any federal debts. The most common federal debt satisfied by the seizure of IRA funds is back taxes owed to the Internal Revenue Service (IRS).
Can IRA assets be seized? ›
In California, some retirement accounts are protected (such as 401ks and profit-sharing plans). Others are more vulnerable to judgment creditors (such as IRAs). A judgment creditor's ability to get your retirement account in California will depend on what type of retirement account you have and how much you have in it.
What states protect IRA from creditors? ›
State by State IRA Protection Comparison
| State | IRA Exempt | Roth IRA Exempt |
|---|
| Alaska | Yes | Yes |
| Arizona | Yes | Yes |
| Arkansas | Yes | Yes |
| California* | Partly | No |
46 more rowsThere are no federal protections in place shielding your IRA from seizure in a lawsuit.
What assets are at risk in a lawsuit? ›
Other expected (future) assets besides wages can also be seized. These might include commissions, royalties, tax refunds, insurance payouts, stock dividends, stock options and even certain types of trust income. Past assets that you recently transferred to someone else are vulnerable to seizure as well.
Can someone sue me and take my IRA? ›
If a creditor comes after you for a debt that you supposedly owe, it will be trivial for them to get a judge to force you to take money out of your IRA to pay that debt. Similarly, if you are sued in civil or criminal court and are found guilty or liable, money in your IRA could be used to pay damages and court fees.
Is retirement income protected from lawsuits? ›
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 a collection agency take your IRA? ›
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.
Yes, if someone files for bankruptcy and they have money from an inherited IRA, those funds can be taken by creditors. This is true even though retirement funds are often exempt in bankruptcy filings.
Can creditors access IRAs? ›
States vary on how IRAs are protected from lawsuits; while some offer full or partial protection, others provide only limited or no protection at all. No matter your state of residence, creditors cannot seize your retirement assets in case of nonpayment of credit card debt lawsuits.
How do I protect my assets from being seized? ›
6 Ways To Protect Assets From Lawsuits Or Creditors
- Limited Liability Company (LLC)
- Trust (Irrevocable)
- Insurance Policies.
- Homesteads.
- Titling – Play Safely.
- Transfer The Assets.
In other words, a Self-Directed IRA LLC can be helpful in protecting your IRA from creditors, although a charging order can threaten an IRA LLC and its assets. However, when you form a Self-Directed IRA LLC, it could provide an even greater shield against creditor attacks.
Can an IRA be taken in bankruptcies? ›
The good news is that bankruptcy laws consider your retirement account "protected assets." You can file bankruptcy without impacting your retirement accounts.
Can the IRS garnish an IRA account? ›
IRC § 6331(a) provides that the IRS generally may “levy upon all property and rights to property,” which includes retirement savings.
Can someone go after your 401k in a lawsuit? ›
To summarize, most employer-sponsored or employer-managed retirement accounts are protected from creditors. If you have a 401(k), the odds are good that the account is protected against all kinds of creditor-related threats, lawsuit damages, and similar claims.
Can pensions be garnished for a lawsuit? ›
Federal law protects some pensions, like Social Security, from being garnished for most debts, but private pensions and certain federal retirement benefits might be susceptible to garnishment.
What is the strongest asset protection? ›
An asset protection trust (APT) is a trust vehicle that holds an individual's assets with the purpose of shielding them from creditors. Asset protection trusts offer the strongest protection you can find from creditors, lawsuits, or any judgments against your estate.
