Is My 401(k) Protected From Creditors?

Photo by 401(K) 2013

In a word…Yes.

I get asked this question frequently. In fact both qualified plans like a 401(k), and IRAs have protection from creditors. It depends on the state you live in and the type of judgement you face.

In 2005 the Bankruptcy Abuse Prevention and Consumer Protection Act specifically excludes employer-sponsored retirement accounts with an unlimited amount from a bankruptcy estate. The Act also protects IRA and Roth IRA assets of up to $1 million from bankruptcy assets.

Everyone’s situations is different so seek out experienced legal counsel.

An exception. While qualified plans are generally protected, business owners are an exception. Accounts established for a business owner and his or her spouse can still be seized in certain lawsuits. So it’s important to properly structure the business and pick up some umbrella liability insurance.

Another important point. Now even though your 401(k) is protected from creditors should you file bankruptcy, the Feds can still get ya! IRS levies are not exempt, it doesn’t matter where the assets are held.

Last important point. If you have an outstanding loan against your 401(k), you won’t lose that money to a judgment if you do not make payments. Rather, your loan becomes a taxable distribution, where all taxes and penalties may apply.

Most of the people that ask me this question are not facing bankruptcy. I think they just want to know just in case. If you liked this article, subscribe here for free! Your subscription is protected from creditors by me!