Are IRAs in Illinois Exempt From Creditors?

Typically, you will enjoy Illinois IRA creditor protection if you owe people money and cannot pay. As a result, your creditors can neither garnish nor seize retirement investments in an account you own, thus safeguarding your future from your present mistakes. However, the rule may have some exceptions.

Dealing With Your Creditors

Studies show that up to 80 percent ​of Americans are in some debt. These include mortgages, credit card, medical and student loan debts. And while many people tend to make bad decisions, which lead them to financial problems, that is not always the case.

For example, no human being has complete control over their health. Sometimes, people fall sick and may not be in a position to cater to their healthcare needs. Before they know it, they owe money for treatment and start struggling to pay it off. That is how 17.8 percent​ of people with credit reports have ended up with medical debt in collections.

So, if you find yourself in severe debt and vulnerable to bankruptcy, it would help to try to find solutions to safeguard your retirement investments. Also, find ways of preserving as many other assets as you possibly can.

Which States Protect IRAs From Creditors?

If you are worried about your IRA, you should determine whether your state offers creditor protection for these accounts. Some of the states that generally protect both the traditional and Roth IRAs from creditors include:

  • Alabama
  • Alaska
  • Arizona
  • Arkansas
  • Colorado
  • Connecticut
  • Delaware
  • Florida
  • Hawaii
  • Idaho
  • Illinois
  • Indiana
  • Iowa
  • Kansas
  • Kentucky
  • Louisiana
  • Maryland
  • Massachusetts
  • Michigan
  • Minnesota
  • Missouri
  • Nevada
  • New Mexico
  • New Hampshire
  • New Jersey
  • New York
  • North Carolina
  • North Dakota
  • Ohio
  • Oklahoma
  • Oregon
  • Pennsylvania
  • Rhode Island
  • South Carolina
  • South Dakota
  • Tennessee
  • Texas
  • Utah
  • Vermont
  • Virginia
  • Washington
  • Wisconsin

However, it would help if you remembered that even though the above states typically offer protection for the Roth and traditional IRAs, some circumstances can remove those protections. For example, in Kentucky, the law will not protect any contributions you make ​120 days​ or less before filing for bankruptcy from creditors. The same thing applies in Michigan.

In Ohio, SIMPLE IRAs and SEPs are not exempt. But there is a specified exemption for inherited IRAs. Therefore, you need to pay close attention to the exemption rules to ensure you minimize the hit to your retirement savings as much as possible.

What Assets Are Protected From Creditors in Illinois?

That you have Illinois IRA creditor protection is good news. But Roth and traditional IRAs are not the only assets protected from creditors. Other assets you may be in a position to protect include:

  • Your clothing items
  • Veterans benefits
  • Disability payments
  • Child support and alimony payments
  • Social Security
  • Public assistance
  • Unemployment compensation
  • A home where you have equity of ​$15,000​ or less
  • A car where your equity is ​$2,400​ or less
  • Tools of trade worth ​$1,500​ or less
  • $4,000​ or additional property that may include bank accounts, furnishings and jewelry

Can a Creditor Garnish an IRA Account?

Generally, an IRA account cannot be garnished by a creditor the way your wages would. However, your Illinois IRA creditor protection has limits. The following circumstances can pose a threat to your retirement savings:

  • If you use your IRA distributions for anything other than taking care of your living expenses, such as starting a new business venture or creating a new fund for investments, you may lose creditor protection.
  • If you contribute assets beyond the set IRS limits, the law will not protect those in excess. A creditor could claim those assets you contributed in excess.
  • If you fail to roll over your funds into a new retirement account within 60 days, those funds may be vulnerable to creditors.
  • An inherited IRA is not safe from creditors. You could lose your inheritance if you owe money and your creditors come after you.

You need to ensure that you take advantage of the Illinois IRA creditor protection available to you if you owe money. In addition, it would help if you were to familiarize yourself with your rights as a debtor so you can protect your personal and work assets. And where possible, try to work with creditors to sort out your debt situation as smoothly as possible.