If it seems that very little is sacred when it comes to creditors and others who make claims on your savings, then you're not too far from the mark. Individual retirement accounts (IRAs) are among those assets that can often be garnished by a creditor or even to whom you owe money.
It's Not the Lawsuit - It's the Judgment
Simply being sued by a party who wants to tap into your assets is not enough to to gain garnishment. Before any assets, an IRA included, can be garnished, the party seeking compensation through garnishment must receive a favorable judgment from the court. That being said, there's nothing to stop a court from freezing assets such as an IRA until a judgment is issued, regardless of whether the party seeking compensation receives the judgment, or the court rules on behalf of the IRA owner.
If you own an IRA that has been subjected to a judgment by a creditor or other party, the bad news is, you may have little recourse. While the Employee Retirement Income Security Act of 1974 (ERISA), extends protection against creditors to many types of retirement funds, this protection is spotty when it comes to IRAs. Only SIMPLE IRAs and simplified employee pension plans (SEPs) that allow employer contributions to IRAs owned by the employees are protected against garnishment by creditors under ERISA.
Although many IRAs are not covered, and therefore protected, by ERISA, a number of states have laws that include IRAs in accounts that are protected from creditor garnishment, but these protections are not ironclad. In most instances, state laws that deem that retirement accounts cannot be garnished to repay debts, either by judgment or through bankruptcy, can be trumped by federal laws applicable to the situation.
Just because your IRA is a SIMPLE or SEP product does not completely protect your money from garnishment. A state court can allow your IRA to be garnished in a family support situation. In this instance, a court could award part or all of your IRA to a spouse, former spouse, child or other dependent. The garnishment would require a qualified domestic relations order, issued by the court, which must, in turn, be honored by the plan.
- DOL.gov: Frequently Asked Questions About Pension Plans and ERISA
- IRA Distributions: Creditors and Bankruptcy
- "The Practical Tax Lawyer"; How Safe Is Your Pension? Creditor Protection For Retirement Plans And IRAs; Richard A. Naegele and Mark P. Altieri; 2008
- final judgment image by Keith Frith from Fotolia.com