Depending on the state where you live, your individual retirement account (IRA) may be garnished by a number of creditors. Unlike 401(k) plans or other qualified retirement savings vehicles, individually established traditional, Roth, SEP, and SIMPLE IRAs are not covered under the Employee Retirement Income Security Act (ERISA). While employer-sponsored retirement plans are 100% protected from creditors, individual IRA accounts are not granted the same protection.
Key Takeaways
- Your IRA can be garnished by the government to pay your federal debts.
- States can create their own rules about garnishing IRAs to pay debts, and those rules vary widely.
- Domestic relations debts, such as child support and alimony, are among the most common causes of IRA garnishment by the states.
Federal Exemption
Other than a partial exemption for bankruptcy, there are no federally mandated exemptions from IRA garnishment. Therefore, your retirement savings can be garnished to satisfy any federal debts. The most common federal debt satisfied by the seizure of IRA funds is back taxes owed to the Internal Revenue Service (IRS).
Federal garnishment of an IRA is most commonly done to pay back taxes to the IRS.
Bankruptcy Exemption
There is some federal protection for your IRA if you declare bankruptcy. However, unlimited protection encourages those in danger of bankruptcy to put all their money into an IRA to avoid paying creditors. To prevent this abuse, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 limited the IRA exemption to $1 million, adjusted every three years. In April 2022, the limit was increased to $1,512,350.
State Exemptions
States can choose to adhere to the federal exemption system or create their own, so specific exemptions for IRA garnishment can vary widely by state. Aside from the IRS or other federal creditors, states can restrict any and all creditor access to IRA funds. In some states, such as New York, IRAs are fully exempt from any nonfederal garnishment.
In other states, IRAs are exempt under certain conditions. One common requirement is the exemption only applies to funds deposited more than 120 days prior to bankruptcy declaration. Another exemption applies to the amount of your IRA deemed necessary to support you, your spouse, and your dependents. Some states impose a cap on this amount, while others do not. In most states, there is also no protection for IRA funds if the account owner owes money in relation to a judgment pertaining to domestic relations debt.
Domestic Relations Debts
There are a number of domestic relations debts that may result in IRA garnishment, depending on your state. Child support is one of the most common causes of permissible IRA seizure. In many states—including Kentucky, Colorado, and Louisiana—IRA funds are provided no protection from court judgments in relation to overdue child support or maintenance.
In other states, your IRA may also be garnished to satisfy other types of domestic relations judgments. In addition to child support arrears, Kentucky, Louisiana, and Rhode Island also allow garnishment to fulfill alimony requirements. Wisconsin allows for the seizure of IRA funds to fulfill court orders related to marriage annulment, divorce, or legal separation.
Early Withdrawal Penalty Exemption
Any distributions taken from your IRA before you reach age 59½ are usually subject to a 10% tax penalty. Unfortunately, this also applies to any amount withdrawn to satisfy creditors before you reach retirement age. However, if your IRA is garnished to satisfy a debt to the IRS, the penalty is waived.