Which Retirement Funds Are Protected From Creditors?
Many assume their retirement funds are protected from creditors, but depending on the type of retirement account you have and the state where you live, this is not necessarily the case. The good news is that many employer-sponsored plans generally have the best protection. If you are concerned creditors might come calling, here is what you need to know.
Key Takeaways
- Most employer-sponsored retirement plans, such as a 401(k), fall under ERISA guidelines and are protected from creditors.
- Non-ERISA plans—such as traditional and Roth IRAs—typically do not have the same level of creditor protection, unless the funds were rolled over from an employer-sponsored plan, like a 401(k).
- These retirement assets are nonetheless protected under a federal bankruptcy law if you file for bankruptcy.
ERISA-Qualified Plans Offer the Best Protection
Retirement accounts that qualify under the Employee Retirement Income Security Act (ERISA) are generally protected from creditors, bankruptcy proceedings and civil lawsuits. Your retirement assets are not at risk if your employer declares bankruptcy. In addition, creditors to whom you owe money cannot make a claim against funds held in your retirement account.
To be ERISA-qualified, a retirement plan must be set up and maintained by your employer (and/or a separate employee organization) and comply with federal rules regarding reports to plan participants, funding and vesting. Common types of ERISA accounts include 401(k) plans, deferred compensation plans, pensions and profit-sharing plans.
In addition to employer-sponsored plans, ERISA may cover employee health and welfare benefit plans. Common ERISA-covered plans include:
As with many employer-sponsored plans, the assets in these plans are exempt from seizure by any creditors. Take, for example, one important feature of an ERISA-qualified plan: the anti-alienation clause. This clause states that “benefits provided under the plan may not be assigned or alienated.”
When ERISA Plans Are Vulnerable
ERISA-qualified plans may be at risk under certain circumstances and can be seized by:
Non-ERISA Plans Are Not Always Protected
Plans that are not ERISA-qualified do not offer the same level of protection when it comes to creditors, bankruptcy and lawsuits. Common types of non-ERISA retirement accounts include individual retirement accounts (IRAs) without substantial employer involvement, such as the traditional and Roth IRA. In addition, some types of 403(b) plans provided by government or churches may be exempt from ERISA.
Although IRAs are not ERISA-qualified, the funds are protected under a separate law—the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA)—but only if you file for bankruptcy.
What Type of Accounts Are Protected From Creditors?
ERISA-qualified retirement plans are generally protected from creditors. These plans include 401(k)s, pensions, profit-sharing plans, and health and welfare benefit plans, including HRAs and FSAs.
Is My 401(k) Protected If I Get Sued?
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 Debt Collectors Go After Retirement Accounts?
Though plans covered by ERISA—like 401(k)s—are protected, depending on the state in which you live, your IRA and other non-ERISA plans may, or may not, be protected from creditors. Some states, for example, shield IRAs in nearly all instances, while others offer only limited protection. If you are at risk of creditors pursuing you, speak to a local attorney who understands the nuances of your state. The laws can be complex.
The Bottom Line
The ultimate value of your retirement account depends on many factors, including how much you save each year, your time horizon and the performance of the investments. However, there’s something else that can undermine your retirement funds: creditors.
While many employer-sponsored retirement accounts—including most 401(k)s—are protected against creditors, that’s not always the case. If you have questions about your plan and whether or not it is ERISA-qualified, speak with the plan administrator.