Can Creditors Garnish a 401(k) With a Judgment?

A docketed civil judgment against you for an unpaid debt is, in most cases, a prerequisite to obtaining an order of garnishment. Although a wage assignment is the most common option, a judgment creditor can go after money you hold in a bank account, and sometimes a retirement account. Whether a 401(k) is subject to garnishment depends on the creditor, the type of claim, and on whether it receives protection under the Employee Retirement Income Security Act.

A 401(k) plan that meets ERISA requirements enjoys protection from most judgment creditors under the anti-assignment rule. This includes employer-sponsored plans -- but not individual 401(k) plans, plans sponsored by government entities and most plans established and maintained by churches. The rule states that qualified retirement plan benefits cannot be assigned, thus preventing creditors from garnishing your retirement money even if you file for bankruptcy.

The anti-assignment rule only protects qualified 401(k) plans from commercial creditors such as credit card companies and bank loans. The rule does not prevent a state court from issuing a qualified domestic relations order to assign funds for money owed for child support, alimony payments or marital property rights during a divorce. In addition, the Internal Revenue Service can take money from your 401(k) to satisfy an unpaid tax debt. State tax agencies do not have the same privilege, so states cannot garnish or attach money from a 401(k) to pay an overdue tax bill.

Protected retirement funds remain safe from commercial creditors for as long the money remains in the 401(k) account. Once the funds from your 401(k) leave your employer's possession, the ERISA anti-assignment rule no longer applies. This means that any money you withdraw, either as a loan or as a distribution, and deposit in a bank account immediately becomes available to a commercial judgment creditor and is subject to a garnishment order.

Federal laws limit most garnishments to 25 percent of your weekly disposable income. However, your employer only includes involuntary deductions, such as payroll taxes and retirement plan contributions required by law, not the voluntary contributions you make to a 401(k) plan when calculating your disposable income. This leaves 401(k) contributions indirectly subject to garnishment by a judgment creditor.