Employer-sponsored accounts are protected by the Employee Retirement Income Security Act. As such, employer-sponsored 401(k) plans are generally safe from litigation. The only parties that can make claims on that money are the Internal Revenue Service or spouses.
401(k) Protection
Employer-sponsored 401(k) plans are safe from lawsuits. Only the Internal Revenue Service or a spouse can make claims on that money. Employer-sponsored accounts are protected by the Employee Retirement Income Security Act.
Individual retirement accounts, 401(k)s, and other types of tax-efficient plans can help you prevent the loss of your assets in case of a lawsuit. At the federal level, the rules are clear for 401(k) and employer-sponsored retirement accounts.
Retirement accounts set up under the Employee Retirement Income Security Act (ERISA) of 1974 are generally protected from seizure by creditors. ERISA covers most employer-sponsored retirement plans, including 401(k) plans, pension plans and some 403(b) plans.
Company retirement plans, such as 401(k)s, are the most secure because federal law protects them from creditors. IRAs also provide federal creditor protection in bankruptcy situations only for up to $1,362,800 of IRA contributions and earnings in 2019 (that threshold adjusts for inflation).
“Creditors cannot seize your 401(k) assets for medical bills or for any other reason.” The only people who can take what you've saved for retirement is the IRS. “They can seize 401(k) money for federal tax liens you are liable for,” Dana says.
Fortunately, retirement accounts are protected from many kinds of liens and garnishments. In most cases, your retirement account is virtually judgment proof.
Usually, your Social Security can't be garnished. Retirement funds, including Social Security income, are generally protected from creditors. Specifically, up to two months' worth of Social Security benefits deposited into a bank account or on a prepaid card are off limits.
But in California, creditors may come after any IRA assets not deemed necessary for living expenses. They may also come after any distributions you take from your IRA. You can protect up to $1.25 million through bankruptcy, a figure that resets every three years to account for inflation.
According to attorney Gil Siberman, in most legal jurisdictions in the United States a judgment you cannot pay simply turns into another form of debt. As such, it will typically get turned over to a collection agency which will do what it can to be reimbursed for the debt.
The court may order the sale of assets to pay a judgment against them. Their wages may also be garnished until the judgment is paid. It can be difficult to enforce these methods though, and they are often time-consuming. It can take years to receive the amount due you because the payments made may be small.
Creditor protection is universally available for a bankrupt's assets held in a Registered Retirement Savings Plan (RRSP), Registered Retirement Income Fund (RRIF) or a Deferred Profit Sharing Plan (DPSP).
Deposits held in 401(k) plans are covered if the assets in question are held by an FDIC-insured financial institution. The FDIC insures deposits up to $250,000—such as checking, money market, and savings accounts.
Once a pension cheque is deposited into your bank account, it is just money and can be subject to seizure by a creditor who has obtained a judgment against you. But your pension funds may be at even greater risk from the bank itself if you owe them money for, say, credit card purchases, line of credit or car loan debt.
In many states, some IRS-designated trust accounts may be exempt from creditor garnishment. This includes individual retirement accounts (IRAs), pension accounts and annuity accounts. Assets (including bank accounts) held in what's known as an irrevocable living trust cannot be accessed by creditors.
What Type of Liability Protection Do You Get With an LLC? The main reason people form LLCs is to avoid personal liability for the debts of a business they own or are involved in. By forming an LLC, only the LLC is liable for the debts and liabilities incurred by the business—not the owners or managers.
To open a bank account that no creditor can touch, a person can (1) use an exempt bank account, (2) establish a bank account in a state that prohibits garnishments, (3) open an offshore bank account, or (4) maintain a wage or government benefits account.
As reported in the "Wall Street Journal," 401(k) plans at work are protected from just about every type of claim. The primary exception to this rule is that the Internal Revenue Service can pull money out of your 401(k) to pay a tax levy. Hospitals can't take them, though.
In most cases, stocks and brokerage accounts can be garnished by a creditor with a money judgment. However, sometimes a brokerage account may be exempt from garnishment due to federal or state law.