Are Withdrawals from Retirement Accounts Protected from Creditors?

Yes, in most cases, withdrawals or distributions from retirement accounts are protected even after being deposited into a bank account. The protection is dependent on state law. Florida case law protects retirement funds even after being deposited into a bank account. Other states may not afford the same protection to withdrawn funds.

Retirement accounts are generally protected from creditors under Florida law. Florida statute 222.21 protects IRAs, 401k plans, and other tax-qualified plans.

Does that same protection apply to withdrawals from retirement accounts? A client asked whether proceeds withdrawn from tax-qualified retirement accounts remain protected after the money is taken out of the retirement plan.

If the retiree has a judgment against him, the creditor cannot reach money so long as it is held within the plan. In most cases, withdrawals from these plans are deposited in the retiree’s personal bank account. So long as these deposits are traceable, the withdrawals should be exempt. The deposits must clearly identify the source of funds as the retirement plan.

Some clients run into issues when money is withdrawn from a retirement account into one checking or savings account and is then further transferred into another checking or savings account. Further transfers of retirement distributions make it harder to trace the funds to the retirement account.

Commingling of Deposits

Even if a judgment debtor comingles his retirement account withdrawals with other, non-exempt funds, the debtor is still entitled to a hearing to claim an exemption on a portion of the account. In Beardsley vs. Admiral Insurance Company (647 So.2d 327, Fla. 3rd DCA 1994), the court held that even if evidence showed that there had been commingling of exempt and non-exempt funds in a bank account, that there should be an allocation if possible.

Still, the better practice is to ensure that exempt funds are held fully separate from non-exempt funds.

ERISA Protection

Certain retirement accounts, such as a 401(k) plan, are protected from creditors under federal law. The withdrawal of funds from these federally protected accounts could result in the loss of federal protection. In other words, the federal protection provided by ERISA does not extend to funds in the bank account, even if clearly traceable to the source.

However, Florida law would protect the funds withdrawn from the ERISA plans even after being deposited into a bank account.

IRA Protection

Unlike with a 401(k), there is no federal protection for IRAs. Therefore, whether funds withdrawn from an IRA account are protected from creditors depends on state law. In Florida, IRAs are protected from creditors.