By Ian Berger, JD
IRA Analyst
How well are your retirement plan account funds protected from creditors? The answer depends on which kind of creditors you are worried about.
There are two types of creditors that might be coming after your retirement savings. The first is bankruptcy creditors, who are owed money by you after you file for bankruptcy. The second is general (non-bankruptcy) creditors, who are owed money by you outside of a bankruptcy proceeding. These include creditors who’ve won a judgment against you in court and are trying to collect on that verdict.
For workplace retirement plans, it also matters whether your plan is covered by the federal Employee Retirement Income Security Act (ERISA). If your plan is an ERISA plan, you can sleep well at night. Your plan assets are completely shielded from both kinds of creditors. (Not surprisingly, there is an exception allowing the IRS to recoup unpaid taxes.)
Even if your plan is not an ERISA plan, your funds are still completely protected against bankruptcy creditors. This protection comes not from ERISA but from the federal Bankruptcy Code. But the situation may be different if you owe money to a general creditor. In that case, your ability to shield your non-ERISA plan accounts depends on the law of the state where you live. Many states offer complete protection similar to ERISA, but other states provide weaker protection.
How do you know if you’re in a plan covered by ERISA? Here’s a quick primer.
Plans covered by ERISA:
- Most retirement plans sponsored by companies in the private sector, including most 401(k) plans and defined benefit pension plans.
- 403(b) plans sponsored by private tax-exempt employers (such as hospitals) that DO NOT qualify for the ERISA exemption (see below).
Plans not covered by ERISA:
- Plans with no employees other than you and your spouse, such as a solo 401(k).
- 403(b) plans sponsored by private tax-exempt employers that DO qualify for the ERISA exemption. That exemption applies if your employer doesn’t make contributions to the plan and its only involvement with the plan is administering employee elective deferrals.
- Plans sponsored by governmental or church employers. These include the Thrift Savings Plan, which is a 401(k)-type plan for federal government employees and the military. They also include 403(b) plans for public school or church employees and 457(b) plans for state and local government workers.
What about traditional and Roth IRAs? If you’ve filed for bankruptcy, your IRAs are protected from bankruptcy creditors – but only up to an inflation-adjusted dollar limit (currently, $1,711,975). Note that funds rolled over to IRAs from employer plans don’t count towards that limit. As such, the entire $1,711,975 cap is available to shield your direct IRA contributions and earnings.
Traditional and Roth IRAs are not covered by ERISA. So, if you’re not in bankruptcy, you must instead rely on the state law where you live to block your IRAs from general creditors. As with non-ERISA plans, some (but not all) states provide complete protection for IRAs, regardless of size. Others offer only limited protection.
SEP and SIMPLE IRAs have complete protection against bankruptcy creditors, but may not have any protection at all against general creditors. (More about that in a future Slott Report article.)
If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.
https://irahelp.com/creditor-protection-for-your-retirement-accounts/
