Q&A: Retirement funds and creditors

Dear Liz: I keep reading conflicting things about 401(k)s and IRAs. If I roll over my 401(k) from my previous employer into an IRA, is it still protected from creditors? I’ve left it in the old 401(k) plan for now because I’ve read IRAs can be seized in lawsuits or bankruptcy, or alternatively that only $1 million is protected and the rest could be at risk. I’ve read that if I leave it in the 401(k), the whole amount is protected. Can you please help clear up this confusion so I can make a wise decision?

Answer: Your 401(k) is protected from creditors, full stop. Federal law bans creditors from taking money in a pension plan that was set up under the Employee Retirement Income Security Act (ERISA), and that includes 401(k)s as well as traditional pensions.

Your IRA is protected in bankruptcy court up to a certain amount, currently $1,362,800. Whether creditors outside of bankruptcy court can access your IRA funds depends on state law. In California, for example, there’s no specific dollar amount.

If a creditor wins a judgment against you and goes after your IRA, a court would decide how much of the account was necessary for your support and protect that. The rest could go to the creditor.

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