Is my 401(k), IRA, or pension safe from creditors and lawsuits?

Many believe that creditors can’t touch their retirement savings. But in many states—including Minnesota—that’s frequently not true.

If you have an ERISA-qualified 401(k) or pension plan, your savings are probably safe from creditors. In such plans, your money generally has complete protection under federal law from garnishment, attachment, and other creditor remedies, so long as your debt isn’t for failure to pay taxes or for defrauding the plan itself. A qualified 401(k) is subject to federal “anti-alienation” requirements under ERISA law, which means that absent certain exceptions, the money in the 401(k) can’t be touched or borrowed against, by you and your creditors. (Note that “Solo 401(k)” plans probably don’t get the same creditor protection—consult a professional.)

In stark contrast, standard IRAs, pensions, and other non-ERISA plans are subject to state creditor law, and in Minnesota, such plans have very limited protection. The statutory exemptions are found in Minn. Stat. § 550.37:

Subdivision 1. Exemption. The property mentioned in this section is not liable to attachment, garnishment, or sale on any final process, issued from any court.

Subd. 24. Employee benefits. (a) The debtor’s right to receive present or future payments, or payments received by the debtor, under a stock bonus, pension, profit sharing, annuity, individual retirement account, Roth IRA, individual retirement annuity, simplified employee pension, or similar plan or contract on account of illness, disability, death, age, or length of service, to the extent of the debtor’s aggregate interest under all plans and contracts up to a present value of $30,000 and additional amounts under all the plans and contracts to the extent reasonably necessary for the support of the debtor and any spouse or dependent of the debtor. (emphasis added)

The $30,000 exclusion amount is indexed, and the currently applicable number is $69,000. So assuming you aren’t thrown into bankruptcy, a creditor might get your whole IRA or pension minus just $69,000. And don’t expect to be saved by the caveat language, which protects “any additional amounts…to the extent reasonably necessary for the support of the debtor.” That language has been narrowly construed against debtors. See Halliday, on Behalf of Halliday v. Halliday, C4-96-2347, 1997 WL 396233 (Minn. App. July 15, 1997).

Many of the same professionals—doctors, lawyers, business owners, etc.—who are generally more likely to have substantial retirement savings are also at higher-than-average risk of being sued individually. The difference between an ERISA-protected retirement plan and a standard IRA or another non-protected plan could be the difference between preserving your retirement savings and losing them.

Are My Retirement Savings Safe if I Declare Bankruptcy?

Under federal bankruptcy law, the answer is generally yes. Consult a professional.