How to Protect Retirement Accounts from Creditors and Lawsuits

Retirement accounts are among the best-protected assets in the United States, but the level of protection depends on the type of account. An ERISA employer plan—a 401(k), pension, or profit-sharing plan—has unlimited federal creditor protection in every state, in and out of bankruptcy. State law does not control a 401(k)’s protection from lawsuits. A solo 401(k) covering only the business owner is not an ERISA plan.

An IRA has no ERISA protection. Outside of bankruptcy, an IRA’s protection is whatever the owner’s state law provides, and it ranges from unlimited to whatever a court decides the owner needs for retirement support. In bankruptcy, federal law caps the exemption for contributory IRAs at $1,711,975, while a rollover IRA funded entirely from an ERISA plan has no cap.

What Is an ERISA-Qualified Plan?

ERISA (the Employee Retirement Income Security Act of 1974) covers most employer-sponsored retirement plans, including 401(k) plans, private-employer 403(b) plans, traditional pensions, and profit-sharing plans. The statute’s anti-alienation clause prohibits plan assets from being assigned or alienated to creditors. ERISA’s anti-alienation protection is federal law and applies in every state, in and out of bankruptcy.

The U.S. Supreme Court confirmed in Patterson v. Shumate (1992) that ERISA’s anti-alienation provision keeps a participant’s plan interest out of the bankruptcy estate altogether. Because the protection is statutory and admits no judicially created exceptions, ERISA-qualified plan assets cannot be garnished, levied, or seized by judgment creditors regardless of the account balance.

ERISA protection has three exceptions that reach a judgment debtor’s plan assets. A qualified domestic relations order (QDRO) can divide plan assets in a divorce. The IRS can levy retirement plan assets for unpaid federal taxes. Federal criminal restitution orders can also reach ERISA accounts. Apart from those, and an offset the plan itself can take for a fiduciary breach or crime against the plan, no other creditor, including a plaintiff who wins a multimillion-dollar judgment, can access ERISA-qualified plan assets.

Why Owner-Only Plans Are Not Protected by ERISA

A retirement plan covering only the business owner, or the owner and spouse, does not qualify as an ERISA plan. ERISA was designed to protect employees, and a plan without non-owner employees falls outside the statute. A solo 401(k) or a Keogh plan with no employees other than the owner lacks ERISA’s anti-alienation protections.

In bankruptcy, a tax-qualified solo 401(k) is fully exempt under federal law with no dollar cap. The federal cap that limits IRAs in bankruptcy does not reach a 401(k) of any kind. The exposure is outside bankruptcy, where an owner-only plan depends on state law.

Some states, including Texas, extend full creditor protection to these plans under separate statutes, and Florida’s 401(k) exemption covers a solo 401(k) with no dollar cap. Others provide only limited protection; California, for example, exempts a self-employed plan only to the extent a court finds it necessary for the owner’s retirement support. A physician who leaves a hospital employer and opens a solo practice may have strong ERISA protection on the old 401(k) but weak state-law protection on the new solo plan.

In In re Baker (11th Cir. 2009), the Eleventh Circuit reversed a ruling that denied an owner-only Keogh plan Florida’s exemption because the plan was not ERISA-compliant; the statute asks whether the plan qualifies under Internal Revenue Code section 401(a).

Church plans, government plans, and certain deferred compensation arrangements also fall outside ERISA. These plans may have separate protections under state law or other federal provisions, but they do not receive the automatic anti-alienation protection that ERISA provides.

How Federal Law Protects IRAs in Bankruptcy

Traditional IRAs and Roth IRAs receive federal bankruptcy protection under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, but the protection is capped. The current exemption limit is $1,711,975 as of April 2025, adjusted for inflation every three years.

Rollover IRAs funded entirely from a prior ERISA-qualified plan receive unlimited bankruptcy protection. The cap excludes rollover amounts by statute because the money was already fully protected in the plan it came from.

SEP IRAs and SIMPLE IRAs also receive unlimited bankruptcy protection, similar to ERISA plans, because they are employer-established plans under Internal Revenue Code Section 408.

Federal bankruptcy law protects IRAs only in bankruptcy proceedings. In a state court lawsuit where the debtor has not filed for bankruptcy, federal law does not protect IRAs at all. State law controls.

How State Law Protects IRAs from Lawsuits

Outside of bankruptcy, IRA creditor protection depends entirely on state law. Every state exempts at least part of an IRA from judgment creditors; what differs by state is the dollar cap, the support standard, and Roth coverage.

Full protection states. States including Florida, Illinois, Indiana, Kansas, New Jersey, New Mexico, Oklahoma, Oregon, Texas, and Washington exempt the entire IRA balance from judgment creditors without a dollar cap. In these states, a traditional or Roth IRA is as safe from lawsuits as a 401(k).

Capped protection states. Several states limit the IRA exemption to a dollar amount. Nevada and South Dakota each cap protection at $1 million. North Dakota protects $200,000 per account and $400,000 in total, and only for accounts open at least a year. Its dollar limits do not apply to amounts a court decides the owner reasonably needs for support.

Needs-based protection states. A smaller group of states, including California and Nebraska, protects IRA assets only to the extent “reasonably necessary” for the debtor’s support. Georgia exempts an undistributed IRA balance in full and applies the support standard only to payments out of the account. A court weighs the debtor’s age, health, income, other assets, and retirement needs, so a retiree and a younger professional can end up with different protection on the same balance. Since 2025, California sets a floor for consumer-debt judgments equal to the federal bankruptcy cap; a tort or business judgment still gets the support standard.

Roth IRA exclusions. A few states still treat Roth IRAs differently from traditional IRAs. West Virginia protects traditional IRAs under a statute that does not clearly reach Roth accounts, and Nebraska’s support-based standard leaves larger Roth balances exposed. Most states name Section 408A in the exemption statute itself, so a Roth IRA gets the same protection as a traditional IRA. California covers Roth IRAs under the same support standard as traditional IRAs.

A Georgia debtor’s Roth IRAs are excluded from the bankruptcy estate altogether: the Eleventh Circuit held in In re Hoffman (11th Cir. 2022) that Georgia’s IRA garnishment exemption is an enforceable restriction on transfer.

How an Out-of-State IRA Custodian Can Freeze a Protected Account

State IRA exemptions protect the owner based on where the owner lives, and most statutes do not require an in-state custodian. But a creditor who obtains a judgment in one state can serve a garnishment on the financial institution wherever it is located. If the custodian is located in a state with weaker protections, it may freeze the account when it receives the writ, even though the owner lives in a full-protection state like Florida.

The owner then has to litigate in the state where the custodian sits to assert the home-state exemption, which is expensive and not guaranteed to succeed. The practical solution is to hold IRA accounts at a home-state financial institution or a national firm with local offices.

The Rollover IRA Trap

Rolling a 401(k) or other ERISA plan into an IRA trades unlimited federal creditor protection for whatever the owner’s state provides. Inside the plan, the entire balance is protected against every judgment creditor, in every state, in and out of bankruptcy. Once the money sits in an IRA, the only protection outside bankruptcy is the state’s IRA exemption.

In bankruptcy, rollover money keeps its unlimited exemption; the $1,711,975 cap applies only to the owner’s own contributions and their earnings. The rollover portion is still exempt after commingling, but the debtor has to trace it, and a mixed account with contributions and earnings on both sides makes tracing hard. Keeping the rollover in a separate IRA keeps the tracing simple.

Outside of bankruptcy, rollover IRAs lose their ERISA-derived protection entirely. The funds are governed by state law, and in most states the rollover source does not matter. California is the main exception: funds traceable to a private retirement plan keep the plan’s full exemption after a rollover (McMullen v. Haycock, Cal. Ct. App. 2007). Elsewhere, the rolled-over money gets only the state’s IRA exemption, and in a support-based state that means a court decides how much of it the debtor needs.

A person with lawsuit exposure has the most to lose from a rollover. Leaving funds in the employer plan, or rolling them into a new employer’s ERISA plan, preserves the strongest available protection; rolling them into a solo 401(k) or an IRA after leaving an employer gives that protection up outside bankruptcy.

Inherited IRAs After Clark v. Rameker

Inherited IRAs have the weakest creditor protection of any retirement account type. The U.S. Supreme Court held unanimously in Clark v. Rameker (2014) that inherited IRAs are not “retirement funds” for purposes of federal bankruptcy protection.

The Court’s reasoning was that inherited IRA beneficiaries cannot make additional contributions, must take required distributions regardless of age, and can withdraw the full balance at any time without penalty. Because inherited IRAs are not held for retirement, they are not retirement funds entitled to bankruptcy exemption.

After Clark v. Rameker, the federal bankruptcy exemption does not apply to inherited IRAs. Whether an inherited IRA receives any creditor protection depends on state law. Most states have not enacted protections for inherited accounts, which leaves the beneficiary’s creditors with the same access they have to any other inherited asset. Florida is one of ten states that expressly protect inherited IRAs, under Florida Statute 222.21.

An IRA owner can avoid that exposure for a beneficiary by naming an irrevocable trust with spendthrift provisions, rather than an individual, as the beneficiary. The inherited IRA assets then flow into the trust instead of directly to the beneficiary. A judgment creditor of the beneficiary generally cannot reach assets inside a properly structured spendthrift trust; the exceptions are the support and similar claims that state law lets through. The trustee controls distributions, and because the beneficiary has no direct ownership of the IRA, there is nothing for a creditor to seize.

Naming a trust as IRA beneficiary requires careful drafting under the IRS rules for designated beneficiaries; a trust drafted wrong can force a faster payout and a higher tax bill. For a beneficiary with creditor exposure, the protection can outweigh the added complexity.

What Happens After a Distribution?

ERISA’s anti-alienation protection ends when funds leave the plan. Once a participant takes a distribution and deposits the money into a personal bank account, federal law no longer protects those funds. The same principle applies to IRA distributions in many states.

Whether distributed retirement funds keep their exempt status depends on state law and on how the funds are handled. In some states the exemption follows distributions that remain traceable to the exempt source; Florida courts have mostly protected traceable retirement withdrawals, though recent decisions have narrowed that position. Other states treat distributed funds as ordinary assets the moment they leave the account.

In the Florida cases, required distributions have fared better than voluntary ones. A required minimum distribution is a withdrawal the participant had no choice but to take, and denying the exemption would penalize compliance with tax law. A large discretionary withdrawal deposited into a general checking account gives a creditor the stronger argument that the money was converted into an ordinary asset.

Depositing retirement distributions into a dedicated bank account that holds only retirement-sourced funds preserves the ability to trace the money to its exempt origin. Commingling distributions with wages or other non-exempt income in a single account makes tracing difficult and gives a creditor a strong argument that the exempt character has been lost.

Moving retirement distributions from one bank account to another, or through several accounts, weakens traceability with each step. The safest practice is to deposit distributions into a segregated account and leave them there.

Required minimum distributions repeat the exposure every year, because each RMD lands in a bank account. In states that protect traceable distributions, an exempt bank account that receives nothing but the distributions keeps the tracing intact. In states that do not, the money is an ordinary asset once distributed, and only a separately protected form of ownership, such as a tenancy by the entirety account where a married couple can open one, keeps a creditor from reaching it.

Self-Directed IRAs and Prohibited Transactions

Self-directed IRAs—accounts where the owner directs investments into assets like real estate, private companies, or promissory notes—carry a creditor protection risk that conventional IRAs do not. If the account owner uses IRA funds for personal benefit, engages in a prohibited transaction under IRC Section 4975, or commingles IRA assets with personal assets, the IRA can lose its tax-qualified status entirely. A disqualified IRA is treated as a taxable distribution, and the funds lose whatever creditor protection the account had.

Bankruptcy courts have denied exemptions for self-directed IRAs where the owner treated the account as a personal fund rather than a retirement account. A self-directed IRA carries this risk because the owner deals with the assets directly; a rental property or a private company inside the IRA presents chances to cross the line that a brokerage account holding mutual funds never does.

When Retirement Exemptions Are Not Enough

ERISA protection and state IRA exemptions cover retirement accounts, but they do not protect brokerage accounts, real estate equity, or business assets. When total net worth extends well beyond retirement savings, statutory exemptions alone may leave enough exposed assets to make a lawsuit worth pursuing.

The exposure is largest in needs-based states such as California. There, a court can reach whatever part of an IRA it decides the owner does not need for support, a brokerage account has no exemption at all, and the homestead exemption stops at a dollar cap. A physician or business owner whose wealth sits mostly outside the retirement account is exposed on most of it.

An offshore trust puts non-retirement assets in the hands of a foreign trustee that a U.S. court cannot compel to hand them back. The settlor stays subject to U.S. court orders, including contempt, so the structure holds only when the settlor has given up control. For a person whose retirement accounts are only part of the wealth, the trust covers the brokerage accounts, cash, and business interests that retirement exemptions leave exposed.

An offshore IRA structure allows the account holder to invest IRA funds through an offshore LLC while maintaining the account’s tax-deferred status. The IRA retains its retirement account character for tax purposes while gaining the jurisdictional protection of a foreign entity.

Statutory exemptions are enough when they cover so much of a person’s wealth that suing is not worth the creditor’s trouble. Homestead, retirement, and wage exemptions may cover most of what a middle-income professional owns. For a person with substantial assets outside those categories, asset protection planning puts the unprotected portion beyond a creditor’s easy reach through structures such as LLCs and offshore trusts.

401(k) vs. IRA Creditor Protection: How Each Account Type Compares

A 401(k) or other ERISA plan is protected against ordinary judgment creditors in every state, whether or not the owner files bankruptcy, subject only to the exceptions ERISA itself writes in. An IRA is protected in bankruptcy up to $1,711,975 of contributions and their earnings; outside bankruptcy, the owner’s state decides. Rollover, SEP, SIMPLE, and inherited IRAs each follow their own rule.

Account type	In bankruptcy	Outside bankruptcy (lawsuit judgment)
ERISA plan (401(k), 403(b), pension, profit-sharing)	Fully protected; no cap	Protected without limit in every state
Solo 401(k) or other owner-only plan	Exempt with no cap under federal law if the plan is tax-qualified	State law only; full protection in some states, such as Florida and Texas, support-based or otherwise limited in others
Traditional or Roth IRA (contributed money)	Federal exemption capped at $1,711,975 (April 2025)	State law only; unlimited in most states, capped, needs-based, or Roth-limited in about ten
SEP or SIMPLE IRA	Exempt with no cap	State law only
Rollover IRA (from an ERISA plan)	Exempt, no cap, if traceable to the plan	State law only; most states ignore the rollover source (California is the main exception)
Inherited IRA (non-spouse beneficiary)	No federal exemption after Clark v. Rameker	Unprotected in most states; ten states, Florida among them, exempt it

Rolling a 401(k) into an IRA gives up the strongest protection a retirement account can have: inside the plan, no judgment creditor can touch the balance; the day it lands in the IRA, its protection depends on state law. No exemption for any of these accounts stops a qualified domestic relations order in a divorce, an IRS levy for federal taxes, or federal criminal restitution. And every one of these protections weakens or ends once the money is distributed to a bank account.