Can Creditors Take Your Roth IRA?

by Maggie McCormick

When you spend years building up your nest egg, it's hard to think that it could all be gone if creditors get hold of it. Nonetheless, in some areas, it's possible for the courts to require you to use money in a Roth IRA to pay off your debts. Protective laws vary widely from state to state, with some states like Texas and Washington protecting almost all of your assets, and other states like New Mexico and New Hampshire having no specific protection, according to the Los Angeles Times.

Bankruptcy Protection

Though you may have to liquidate other assets if you're going through a bankruptcy, federal law protects up to $1 million in IRA assets from bankruptcy. This is a combined total, which might be spread over traditional and Roth IRAs. Other types of creditors, though, may be able to access the money.

Reasonable Living Expectations

The courts recognize that the money in a Roth IRA is meant for retirement and that you plan on using that money later. For that reason, most judgments will protect a "reasonable amount" of your retirement savings from creditors. This is open to interpretation by the judge handling your case. 401(k) plans are completely protected from anyone other than a spouse or the IRS, and if your 401(k) account has enough money to "reasonably support" you, based on your future earning potential and life expectancy, then the funds in your IRA may be fair game. The judgment of "reasonable support" may not include living the lifestyle you're used to.

Inherited IRAs

Traditionally, if you inherit a Roth IRA, it will not have the same types of protections that it would if it were an account that you had funded yourself. A court is more likely to decide that you will have to use the funds from this to pay off your debt, though a judge did consider an inherited IRA protected in a 2010 bankruptcy case, according to

Protecting Your Assets

The best way to protect your assets is to keep them in an employer-sponsored plan, such as a 401(k) or 403(b). Aside from that, it's smart for retirees to consider living in a state that has laws that protect the assets in an IRA.

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