Can IRAs Be Garnished by Creditors?

Can IRAs Be Garnished by Creditors?
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Many workers make regular contributions to retirement financial plans, including individual retirement accounts, or IRAs. Though many workers consider these accounts a relatively safe investment, some who carry large debt loads may wonder whether creditors can garnish the accounts to reclaim debt payment. Depending on where the debtor lives, creditors may be able to garnish an IRA.

Garnishment Laws

Laws governing whether a creditor can garnish an individual retirement account vary from state to state, according to the legal website Michigan Legal Aid. A similar website designed for residents of the state of Florida, Asset Protection FL, elaborates that these laws apply to the state where the debtor lives regardless of where the creditor operates. If a debtor lives in a state that protects IRAs, for example, creditors cannot garnish funds in those accounts even if the creditor operates in a state that allows garnishment. If the debtor lives in a state that does not protect retirement accounts, though, creditors may garnish those funds even if they operate in states that extend such protections.


In certain cases, creditors may be able to force debtors to access funds in an individual retirement account to repay outstanding obligations. According to the financial website Best IRA Rescue, creditors can sue very-delinquent debtors to recover balances in almost all states. Because many courts consider the debtors' entire net worth, including IRA balances, when making decisions in these cases, the court may order the debtor to liquidate an IRA and use those funds to repay debts. Best IRA Rescue notes that courts rarely issue such orders, though, and typically do so only when debtors carry very high balances.


As recently as the early 2000s, debtors who filed bankruptcy risked losing the money saved in individual retirement accounts. Federal changes to the bankruptcy code in 2005, though, protected IRA investments up to $1 million, according to "Entrepreneur" magazine. This revision also extended protection for 401k retirement accounts and offered additional exemptions for IRA funds rolled over from an employer-sponsored 401k program.


Best IRA Rescue notes that IRA account holders will experience tax penalties on withdrawals, even if those withdrawals come as a result of a court’s order or creditor garnishment. Creditors typically do not pursue retirement accounts, though, and financial planners advise debtors to continue making regular contributions to retirement accounts even in the face of a pending lawsuit or garnishment. Best IRA also explains that 401k retirement plans may offer some protections not available in individual retirement accounts, so debtors who owe large balances may consider using IRA funds to open a company-sponsored 401k account if that option exists.