Protecting your 401k and IRA funds against bankruptcy and creditor judgments

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By: NathanielCopeland
on 17th Jun,2013

Retirement and tax benefits aside, it forms the kind of stable financial foundations that most people desire.
Protecting your 401k and IRA funds against bankruptcy and creditor judgments


Self employed or salaried, you and every other working American knows pretty well that saving money is important, especially when it comes to retirement and future financial planning. Although it is quite a daunting task to calculate the exact amount that you should necessarily save as a part of your retirement funds, things are rendered fairly simple by Federal retirement plans like the popular 401(k) or the Roth IRA options.

Most people spend a substantial part of their monthly income making contributions to their IRA or 401(k) funds. Retirement and tax benefits aside, it forms the kind of stable financial foundations that most people desire. But, life is full of surprises, both pleasant and unpleasant, which might end up derailing your financial plans.

One of the more common of these unpleasant surprises might be sudden and unexpected unemployment coupled with a rising pile of debts which force you to consider bankruptcy as a possible option for gaining some sort of financial relief. Now as is common knowledge, people who file for bankruptcy lose most of their assets which are liquidated and used to repay their creditors.

Assets maybe anything starting from a bank account, a house, a car and even your savings. So what happens to the substantial sum of money that you have had stashed away in your 401(k) and IRA funds? Here is an insight into the information you might have been looking for.

Employer sponsored and solo 401(k)



Under the terms of the Employee Retirement Income Act (ERISA), your 401(k) or any other employer sponsored qualified plan is protected from creditor lawsuits and bankruptcy. Retirement savings derive the maximum protection under ERISA, especially if you have creditors threatening to sue you over a debt.

As mentioned before, employer sponsored 401(k) funds are immune to bankruptcy as well as creditor judgments. However, personal 401(k) plans do not always have the same degree of protection under Federal laws. State laws come into play at this point and the level of protection your personal 401(k) fund has will be decided accordingly.

There are however a couple of exceptions when it comes to your employer sponsored 401(k) being absolutely immune. Federal tax liens brought on by the IRS can be attached to your 401(k) funds. The other exception is for individuals with judgments against them which pertain to the embezzlement or fiduciary breeches of the fund.


IRA funds



Federal laws do provide protection for Individual Retirement Accounts (IRAs) as well as Roth IRAs but the degree of protection is not the same as that for 401(k) funds. As per the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, IRA assets worth up to $1 million is protected in case the account holder decides to file bankruptcy.

The ambiguity arises from what the law has to say about that part of the IRA funds that you have rolled over from employer sponsored plans. Although most experts agree that it can be interpreted as legal protection for the funds you have rolled over, there are no define case laws or rulings to determine the matter conclusively.

In case you are stashing away your money in 401(k) or IRA funds just so you can protect it against creditor judgments and bankruptcies, there are a couple of more options as far as defending your savings is concerned. You can consider investing in a professional malpractice insurance policy which is in turn backed up with a personal liability umbrella policy.


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