Can Creditors Take My Retirement Funds? (Part One)

Photo by Michael Mulligan

Photo by Michael Mulligan

Written by Summerville Bankruptcy Lawyer, Russell A. DeMott

Clients are naturally concerned about their retirement funds.   And they should be.   All of us will get to the point in our lives when we can no longer work.   Our retirement savings, along with our Social Security, will be our sole sources of income.

Can creditors seize my 401(k) or pension?

Almost always, the answer is no.   401(k)s, 403(b)s, 457s and similar plans, as with defined benefit plans (pensions) are protected under a federal law called the Employee Retirement Income Security Act (“ERISA”).   To be qualified under ERISA, retirement plans must prohibit assignment or alienation of the plan.   In plain English, that means the plan must prohibit the employee from giving away his interest in the plan, and the the plan must also prohibit creditors from taking the employee’s interest in the plan.

The result is that creditors cannot reach ERISA-qualified retirement assets either in bankruptcy or outside of bankruptcy.   In fact, unlike almost all other assets of bankruptcy filers, ERISA-qualified retirement assets are not even assets of the bankruptcy estate.

There is one large exception to this: federal tax debts.   The IRS may seize or “levy” retirement assets, even if those assets are held in an ERISA-qualified plan.   So don’t get behind on your taxes!

What about IRAs?

IRAs, while enjoying less protection than ERISA-qualified plans, are virtually impossible for creditors to reach, except for Uncle Sam of course.   South Carolina law exempts IRAs from levy “to the extent reasonably necessary for the support of the debtor and any dependent of the debtor.”   So unless you have a huge amount in your IRA–far more than you would need to “reasonably support” yourself or your dependents–the IRA is exempt under South Carolina law.

In addition, if the IRA owner files bankruptcy, the protection   is even stronger  unless the debtor has more than $1,095,000 in the IRA. (Yes, that’s over one million dollars!)

Our governments, both state and federal, have made a policy decision with these provisions.   The policy is to protect retirement assets from the reach of creditors.   The government knows that if creditors can reach retirement assets, it would have to step in and help support retirees.   Social Security does that already to some extent, but it’s a massive entitlement program quickly running out of money.   So unless the government itself (via the IRS) is getting the money, it’s “hands off” retirement assets for creditors.

In “Can Creditors Take My Retirement Funds? (Part Two),” I’ll discuss how you should use this protection when dealing with financial problems.

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