Although some states protect Individual Retirement Account (IRA) savings from garnishment of any kind, most states lift this exemption in cases where the account owner owes child support.
Unlike 401 (k) plans or other qualified retirement savings accounts covered by the Employees Retirement Income Security Act 1974 (ERISA), individual IRA accounts are not automatically protected against seizure. – judgment by creditors.
If you are ordered by the court to honor a debt, including the payment of overdue child support, your IRA counts as an asset that can be used to settle that debt. Although there are certain situations in which your IRA may be exempt from garnishment, non-payment of child support is usually not one of them.
The degree to which IRAs are protected from garnishment is determined in large part by state governments. The federal government has its system of exemptions, but states are allowed to choose between adhering to federal regulations or creating their systems.
Most states choose to develop their exemption systems, which means the specific protections offered can vary widely depending on your state of residence.
Key points to remember
- Individual IRAs, which are not governed by ERISA, are not exempt from court-ordered garnishments.
- States can use the US federal government’s exemption system or create their own.
- In the event of bankruptcy, individuals can have up to $ 1 million in protection for their IRA under the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) if their state allows it.
- Most states do not provide any exemptions to absolve IRA holders of their child support obligations.
Under federal law, there is no protection for IRA funds except in bankruptcy. The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005 protects up to $ 1 million in your IRA savings if you file for bankruptcy.
However, states have the final say on the bankruptcy regulations that apply to their residents. This means that the $ 1 million BAPCPA exemption only applies if your state of residence allows you to choose between the state-specific exemption system and the federal exemption system.
In some states, residents do not have a choice between state and federal exemptions.
Aside from this partial bankruptcy exemption, IRAs can be entered to pay off any federal debt, including debts to the IRS for overdue taxes.
Most states offer some form of limited protection for IRAs. In bankruptcy, for example, many states exempt all IRA funds deposited more than 120 days before filing for bankruptcy. In Minnesota, only IRA funds greater than $ 75,000 can be garnished to satisfy creditors.Your IRA funds may also be exempt from garnishment to the extent that they are necessary for you and your dependents, although some states cap the maximum amount of IRA funds that can be considered “necessary.”
Although several possible exemptions protect your IRA from creditors, many states lift these exemptions for judgments relating to family relationships. Garnishment to meet child support obligations is the most common exception to these protections. In many states, including Kentucky, Colorado, Wisconsin, and Louisiana, IRAs have no protection against collections related to overdue child support.Alimony, divorce, annulment, or legal separation judgments are also common exceptions to state exemption laws.
Kansas, Connecticut, Illinois, and New Jersey are some of the states that offer comprehensive protection for IRA retirement savings.In these states, your IRA cannot be garnished for any reason, even if you owe overdue child support.