As a matter of public policy, our lawmakers under both federal and state law have determined certain assets should be exempt from creditor claims. Retirement accounts often receive significant protection, but the extent of that protection depends on the type of account, whether the owner has filed for bankruptcy, and the law of the applicable state.
In Part I of this series, we will discuss the creditor protection available for retirement accounts. In an upcoming Part II, we will discuss additional assets that may be protected from creditors.
FEDERAL LAW
Federal Bankruptcy Code. Certain retirement accounts are broadly protected in the event of a federal bankruptcy action, such as 401(k)s and 403(b)s; however, other retirement accounts, such as Traditional IRAs and Roth IRAs, are only protected up to a maximum amount. As of April 1, 2025, that limit is $1,711,975, subject to periodic inflation adjustments. Qualifying amounts rolled over from an employer-sponsored retirement plan generally are not counted against that limit.
ERISA. The Employee Retirement Income Security Act of 1974, commonly known as ERISA, generally protects qualified retirement plans from claims by creditors (without the need for a federal bankruptcy action), which includes 401(k)s, defined benefit plans, etc. However, not all retirement plans are governed by ERISA and, as such, may only be protected in the event of a federal bankruptcy action. Moreover, retirement plan protection is not absolute. Exceptions may apply to certain federal tax claims, qualified domestic relations orders, and other claims recognized under federal law.
Inherited IRAs. In Clark v. Rameker, the US Supreme Court determined that an IRA inherited by a non-spouse beneficiary did not constitute “retirement funds” for purposes of the federal bankruptcy exemption . As a result, a non-spouse beneficiary generally cannot rely on that particular federal exemption to protect an inherited IRA in bankruptcy The decision does not necessarily mean that an inherited IRA is exposed to every creditor. State law may provide separate protection, and the result may differ for other types of inherited retirement benefits. A surviving spouse also has options that are not available to a non-spouse beneficiary.
STATE LAW
Many states have greater protection for retirement plans from creditors for residents of their state. For example, under North Carolina law, retirement accounts are generally protected from creditors. Because state laws vary considerably, the owner's state of residence and the particular type of account should be reviewed before assuming that retirement assets are fully protected.
PRACTICAL PLANNING STEPS
There are steps that can be taken to ensure additional levels of security.
Keep beneficiaries up to date. Keeping beneficiaries up to date helps ensure retirement accounts are distributed to the person the owner presently intends. If no valid beneficiary designation applies, the account may become payable under the plan's default provisions or to the owner's estate, potentially subjecting it to probate and claims against the estate.
Coordinate your retirement account beneficiaries with your estate plan. Estate planning documents alone will not ensure retirement accounts are distributed to desired beneficiaries in the manner intended. Retirement accounts pass by beneficiary designation, so they will not automatically pass in accordance with estate planning documents (whether a Will or Trust) unless those designations are thoughtfully coordinated with your plan. This is especially important when the intended beneficiary is a minor, a person receiving means-tested government benefits, a person with potential creditor concerns, or a beneficiary for whom continuing trust protection is desired.
Consider whether a trust should be named as beneficiary. For some families, naming a properly drafted trust as beneficiary may provide continuing management and creditor protection after the retirement benefits are inherited. However, naming a trust can create significant income-tax and required-distribution consequences, so the trust and beneficiary designation must be carefully coordinated.
CONCLUSION
Retirement assets often receive substantial creditor protection, but that protection varies based on the account, the governing law, the source of the funds, and whether the owner or beneficiary is in bankruptcy.
Retirement account beneficiary designations should be reviewed as part of the estate-planning process to ensure that they accomplish the owner's distribution, tax, and asset-protection goals. An estate-planning attorney, bankruptcy attorney, tax advisor, and financial advisor may each have an important role when creditor exposure is a significant concern.
