Are IRA's Protected?

Ask the Experts: Can creditors reach my IRA assets?

Traditional and Roth IRAs generally aren't subject to ERISA (we'll discuss SEPs and SIMPLE IRAs later). Therefore, they don't qualify for the broad protection from creditors that ERISA typically provides. However, even though ERISA doesn't apply, federal law still provides protection for up to $1,095,000 (in 2009) of your aggregate traditional and Roth IRA assets if you declare bankruptcy.

If you've rolled any funds over from a 401(k) or 403(b) plan (or another qualified plan) to your IRA, then those assets, and any earnings on them, aren't subject to the $1,095,000 cap, and are fully protected. (You may want to consider setting up a separate IRA to hold rollover funds so that you can more easily identify the amount eligible for full protection if you declare bankruptcy.)

But, with IRAs, federal law governs only bankruptcy claims. Whether you'll have protection from your creditors outside of bankruptcy will depend on the laws of your particular state.

Different rules apply to SEP IRA and SIMPLE IRA plans. SEP and SIMPLE IRAs are fully protected from your bankruptcy creditors under federal law--the $1,095,000 limit doesn't apply. But whether or not your SEP/SIMPLE IRA has protection from your creditors outside of bankruptcy may depend on whether your plan is governed by ERISA (because it covers one or more common law employees).

If your SEP/SIMPLE IRA plan isn't subject to ERISA, whether you'll have protection from your creditors outside of bankruptcy will likely depend on the laws of your particular state.

But if your SEP/SIMPLE IRA is governed by ERISA, whether you'll have protection under state law from creditors outside of bankruptcy is not clear. These plans are not covered by the part of ERISA that protects assets from creditors generally. But they are subject to the part of ERISA that preempts state laws. So state laws that may have provided protection for your SEP or SIMPLE IRA account from nonbankruptcy creditors may not be available.

These rules are obviously quite complicated. Be sure to consult a qualified attorney if creditor protection is important to you.