Can Creditors Come After My IRA?

When you fall behind on repaying a debt, whether it's a loan or a credit card balance, the entity you owe money to may not just let it go. And so a creditor might take action by suing you in court to recoup the money it's owed. If a judgment is entered against you, a creditor may be allowed to go after different assets of yours, including money you have in a savings or checking account.

But what about the money you've socked away for retirement? Can creditors go after those funds, too?

The answer is, it depends on the type of account you have and where you live. But if you have an IRA, you should know that a creditor may have a right to go after that money.

IRAs don't offer the same protection as 401(k)s

Employer-sponsored 401(k) plans are protected by the Employee Retirement Income Security Act (ERISA), which means creditors cannot go after them. There are a few exceptions, such as if your creditor is the IRS and the debt in question is an unpaid tax bill. But generally speaking, 401(k) assets are protected from creditors.

The same can't be said for IRAs, though. IRAs aren't covered by ERISA because they're individually owned, as opposed to 401(k)s, which are owned by a plan administrator. And so if you're sued in court and your creditor wins, they may be able to come after your retirement savings in an IRA.

It's worth noting that many state laws protect IRA funds. But that's not universal. In California, for example, your IRA funds are protected only to the extent of money needed to support you and your family at the time of your retirement while taking the total of your assets into account. So if you have a $200,000 IRA balance but it's determined that you only need $100,000 of that for retirement, you might risk losing the remainder of your balance if you owe a creditor that much.

And either way, IRA funds are not protected once you withdraw money from your account. So if you transfer $10,000 from your IRA to your bank account, a creditor can, generally speaking, go after that money without an issue if a court determines it can.

You may want to keep some long-term savings in a 401(k)

The nice thing about IRAs is that you can manage your account yourself, and you'll generally get far more investment choices than with a 401(k). That could result in lower fees, which is a good thing, since fees can eat away at your returns and leave you with less money.

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But if you have an IRA and also have access to a 401(k) plan, then it could make sense to contribute some money to the latter as well. That way, if you're ever in a situation where a creditor comes after your assets, you won't have to worry about losing a chunk of your retirement savings.

Plus, many 401(k) plans offer some type of employer-matching component. That's free money for your retirement, and it's something you won't find with an IRA. So for that reason alone, having a 401(k) on top of an IRA could make a lot of sense.