A 401(k) fund is a popular way to save for retirement. Your employer sets up the fund, and you put a percentage of your income into it. Often your employer matches your contributions up to a certain level. These accounts are intended for retirement and, in many cases, federal or state laws prevent creditors from seizing them.
If your 401(k) plan is qualified under the Employee Retirement Income Security Act, then the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 prevents its seizure to pay most debts. ERISA-qualified plans provide you with regular written information, include employer contributions, guarantee benefits to employees upon retirement or termination, and prohibit employees from voluntarily transferring their benefits to someone else. Employers aren't required to comply with ERISA, but most do. If you're unsure if your 401(k) is ERISA qualified, ask your employer.
While a qualified plan generally is protected, some creditors can still seize it. These include the Internal Revenue Service for federal tax debts or ex-spouses as a marital asset or for child support. The federal government also can seize it if you don't pay fines for criminal offenses. The 401(k) plan itself can seize your assets if you defraud the plan or violate a rule.
If your 401(k) isn't covered by ERISA, federal law doesn't protect it from seizure. State laws sometimes protect some or all of your nonqualified 401(k). For example, New York's Exempt Income Protection Act prevents creditors from grabbing any 401(k) assets, regardless of whether they are qualified or not. Florida protects all retirement accounts payable to public employees such as teachers. If creditors are hounding you and you have a nonqualified 401(k), look at your state laws to determine your rights.
Rollovers and Hardship Distributions
Rollovers, or direct transfers of money from one qualified 401(k) to another, are protected. Hardship distributions or funds you take out of the plan to pay your mortgage or medical bills are not protected; so think carefully about whether you want to withdraw your money to pay one bill when creditors for other bills have judgments against you.
- Nolo.com: Can Judgment Creditors Go After My Retirement Accounts?
- New Economy Project: What Is Exempt From Debt Collection?
- The New York Times: Protecting Retirement Accounts From Creditors
- Alper Law: Statutory Exemptions
- American Institute of CPAs: Protection From Creditors for Retirement Plan Assets
- Government Printing Office: 109th Congress Public Law 8
Randi Hicks Rowe is a former journalist, public relations professional and executive in a Fortune 500 company, and currently a formation minister in the Episcopal Church. She has been published in Security Management, American Indian Report and Tech Republic.She has a bachelor's in communications, a master of arts in Christian education and a master of business administration.