401k and IRA plans are protected from lawsuits, including bankruptcy, up to certain limits. If you participate in a 401k plan or IRA, these protections are important. Make sure you understand all of the benefits and limitations of these protections so that you can get the most out of your retirement account if you are ever sued or have to file for bankruptcy.
IRAs are protected by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. This act protects your IRA from bankruptcy up to $1 million. Any dollar amount over this may be subject to creditor collection.
401k plans are protected from lawsuits and bankruptcy under the Employee Retirement Income Security Act. ERISA laws establish the rules and protections for retirement accounts. Under ERISA, 100 percent of your 401k plan is exempt from creditor collections.
The benefit of these protections is that you won't have to worry about rebuilding your retirement income if you get sued. Instead, you may focus on paying off your debts with the money that you do have available to you while not sacrificing your future retirement plans.
The limitations to the protections on 401k plans and IRAs are that if you withdraw money from the plan, you may not be protected. This depends on the particular situation you are in and the state you live in. Also, you have no protection from the IRS for either account type. The IRS may seize 401k accounts and IRAs up to 100 percent of the account balance to satisfy a tax debt you owe.
- "Practicing Financial Planning for Professionals (Practitioners' Edition), 10th Edition"; Sid Mittra, Anandi P. Sahu, Robert A Crane; 2007
- "The Wall Street Journal": How to Protect 401(k)s and IRAs From Creditors