Protecting Retirement Accounts from Creditors

Degrees of legal protection differ for 401(k)s and IRAs.

(Image credit: Gary Burchell)

With debt burdening many Americans, preretirees and retirees should understand the creditor protections for retirement accounts before raiding those accounts through loans or withdrawals. Those protections can help preserve hard-earned savings even after suffering a tough financial squeeze.

But the rules for those protections vary by account type, which IRA expert Ed Slott and his team explained at Slott’s recent two-day workshop in National Harbor, Md. Company retirement plans, such as 401(k)s, are the most secure because federal law protects them from creditors. IRAs also provide federal creditor protection in bankruptcy situations only for up to $1,362,800 of IRA contributions and earnings in 2019 (that threshold adjusts for inflation). IRA money rolled over from company plans receives unlimited bankruptcy protection.

In most cases, state law dictates creditor protection for IRAs when it comes to other judgments. Someone who has significant concerns about creditor protection might consider leaving money in a company plan instead of rolling it over to an IRA.

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Regardless, before doing a rollover, it’s a good idea to check the protections that the law provides in your state. Some states offer limited or no creditor protection. To ensure the unlimited bankruptcy protection for rollovers, keep good records or roll a company plan into an IRA separate from other IRAs you own.

Rachel L. Sheedy
Editor, Kiplinger's Retirement Report