ARE RETIREMENT ACCOUNTS PROTECTED FROM CREDITORS?
By Kim K. Steffan, Attorney
Job losses during difficult economic times caused some people who had always paid their bills to become delinquent on debts like credit cards and consumer loans. In some cases, creditors got judgments against them, or threatened to. A common question in those cases is whether their creditors can take their retirement accounts. Many of those clients have put a little away each year for a long time, and would hate to lose this retirement nest egg.
The good news is that retirement accounts which you fund while you are working are generally safe from most creditors. N.C. General Statute section 1C-1601 covers what assets creditors can seize and sell to satisfy judgments – a topic which is entirely separate from filing bankruptcy, by the way. Under that statute, money in your 401(k), traditional IRA, Roth IRA, and/or 403(b) is protected. Whether you file bankruptcy or not, NC law applies to allow an unlimited dollar amount of protection for qualifying retirement accounts. Your contributions to your employer’s pension plan (like the N.C. State Retirement System) are also safe, but for a different reason – because they are held by the pension plan and are not assets in your name.
In fact, if you see creditor problems coming up, you might choose to contribute as much as you can (subject to annual limitations by law, which depend in part on your age) to protect those dollars from creditors too. If those same funds are left in your bank account or used to purchase an extra vehicle, for example, a creditor can easily take the funds or the vehicle to satisfy a judgment entered against you.
The rule I’ve described governs consumer debt like credit cards, furniture store loans, deficiency judgments on vehicle loans, personal loans, etc. As you might guess, there are some non-consumer creditors that can seize your retirement accounts – e.g., when the United States, North Carolina, or a County is the creditor, or when needed for paying alimony or child support.
Some clients follow up with this question: Didn’t I hear news about a U.S. Supreme Court case making retirement accounts fair game for creditors? The Clark case in the summer of 2014 held that when you inherit an IRA from someone other than a spouse, your inherited IRA funds are not protected from your creditors. Why treat IRAs inherited from someone other than a spouse differently than retirement accounts you have funded? Those accounts are treated differently for tax purposes than the retirement accounts you fund for your retirement. Inherited IRAs (from other than a spouse) don’t have to be left untouched until you retire. In fact, the IRS requires that you take the money out of these inherited IRAs within a few years anyway (because they want to tax you on the income). That makes these inherited IRAs more like money market accounts than like true retirement accounts. A special rule still protects IRAs inherited from a spouse, because the law recognizes that most couples plan together for retirement using both spouses’ accounts. A lot of news coverage that was just too summary made it sound like the USSC had held all retirement accounts were fair game for creditors, which is not accurate.
So, if you’ve fallen into trouble with consumer debt, you can usually rest easy that your retirement accounts you’ve worked hard to put away for your future are safe. They will withstand consumer creditor claims and still be there to help support you and your spouse during retirement.