If you find yourself in financial hot water, your first reaction is often to wonder how you'll pay your creditors -- your second reaction may be to wonder whether your creditors will pay themselves by taking assets like a home, car or even your retirement account. While other assets may be up for grabs, in most situations, it's unlikely that a bank will be able to take your 401k.
How Banks Take Your Money
Banks want your money when you've failed to repay a debt you owe them. However, you can rest assured that banks can't just take your money and run; in order to gain access to your money, banks must first receive a judgment against you in court. The judgment recognizes the debt as valid, and, in some cases, gives the bank permission to seize your deposits in order to satisfy the debt.
All Deposits Are Not Created Equal
Getting judgment against you is only half the battle when a bank gets permission to take your money. Some income and savings, and hence, deposits, are exempt from debt collection, and therefore cannot be taken to satisfy the terms of a judgment. Examples of income and savings that are exempt include government benefits, child or spousal support, and retirement savings, such as pensions, 403(b) and 401k savings accounts.
ERISA and Your 401k
The savings in a 401k plan are protected from debt collection by the Employee Retirement Income Security Act of 1974, or ERISA. Although the intent of ERISA is to ensure fiduciary responsibility on behalf of pension and retirement plan administrators in regards to investment and maintenance, the act also includes language that prohibits the garnishment of pension and retirement plan savings by creditors, except in certain situations.
ERISA protects your 401k retirement savings from creditors, but that does not mean that it protects your savings from all bank garnishments. A state court can award part or all of your pension or retirement savings to a current or former spouse or child or other dependent through a domestic relations order. In this instance, the court can order bank garnishment of your 401k retirement funds in order to satisfy the terms of the domestic relations order.
- DOL: Frequently Asked Questions about Pension Plans and ERISA
- FTC: Debt Collection FAQs: A Guide for Consumers
- "The Practical Tax Lawyer"; How Safe Is Your Pension? Creditor Protection For Retirement Plans And IRAs; Richard A. Naegele and Mark P. Altieri; 2008
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