Is Your IRA Protected From Creditors? You May Be Surprised

By Sarah Brenner, IRA Analyst
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If you are like many Americans, your IRA may be one of your biggest assets. You may be surprised to discover that this important part of your retirement savings plan may be more vulnerable than you might think. Here is what you need to know about protection of your IRA in bankruptcy and beyond.

Bankruptcy Protection

IRAs have federal protection in bankruptcy proceedings, but that protection is limited. The limit is adjusted every three years. It has now been adjusted for 2016.  The inflation-adjusted limit for the last three years was $1,245,475. Effective April 1, 2016, it will be increased to $1,283,025.

Exceeding the limit probably won’t be a concern for you or any other IRA owner. Since this cap applies only to IRA or Roth IRA tax-year contributions and the earnings on those contributions, the bankruptcy law protects virtually all funds in IRAs. Why? Because it is unlikely that anyone has accumulated an amount over the $1,283,025 limit in an IRA from making annual IRA contributions, even if they have contributed for the 40-plus years that IRAs have been available and have had very favorable returns on investments.

There is more good news. You may wonder about that rollover you did from your 401(k) to your IRA and whether it is protected in bankruptcy. All rollovers from employer plans are protected, and they don’t count toward the capped limit. Your SEP and SIMPLE IRA funds are also exempt, just like rollovers from employer plans.

If you inherit an IRA, you may wonder if the inherited IRA funds would also be protected in bankruptcy. No such luck – at least under federal law. The Supreme Court ruled in a 2014 case that inherited IRAs are not protected in bankruptcy under federal statutes.
 

General Creditors

What sort of protection is available outside of bankruptcy? For example, you might have a judgment against you from a car accident. Is your IRA protected in cases like these? You may be surprised to learn that there is no general creditor protection for IRAs at the federal level. General creditor protection for IRAs is determined at the state level and can vary considerably from one state to the next. Depending on state law, it is possible that your IRA funds could be accessed by your creditors.
 

IRS Levy

What if you owe money to Uncle Sam? Can the IRS come after your IRA? The answer is yes. Many people are not aware of this fact, but the IRS can levy your IRA. Generally, the IRS will levy other types of accounts first, before going after your IRA. However, if you owe money to the IRS, your IRA is not off limits. If your IRA is levied, it will be taxable to you. You will receive a small break though if you are under age 59 ½. There is an exception to the 10% early distribution penalty for distributions due to IRS levies.