Funds set aside for retirement frequently receive substantial protection from creditors under the law. The nature and the amount of the protection depends on state law and who the creditor is. Funds held "in trust" for the asset holder tend to receive stronger creditor protection than funds held in the asset owner's name.
Individual Retirement Arrangements
Federal law exempts the first $1 million in individual retirement arrangement balances from seizure by creditors, though the Internal Revenue Service has been known to levy retirement accounts in extreme cases. Some states, such as New York, provide unlimited creditor protection to assets held in IRAs.
Defined Benefit Pension Plans
Creditors generally have no recourse to attaching balances held in employee pension plans for two reasons: First, these assets aren't even held in pensioners' names, and it is unlikely that the pension plan itself would be named as a co-defendant in any lawsuit. Second, pension managers have a fiduciary duty to disburse funds only to the benefit of plan participants. These rules forbid them from disbursing assets to anyone except a plan beneficiary or his representative, even if there is a judgment in place.
401k and Other Defined Benefit Plans
Like defined benefit plans, assets held in 401k plans are actually not held in the plan members' name, but in trust for their benefit. Many 401k plan rules forbid plan trustees from disbursing funds to anyone except the plan beneficiary or his representative. This means that even the IRS has trouble levying 401k plans. They must instead get a charging order, and wait until the 401k begins dispensing income. Creditors can garnish income from these plans, in some circumstances, but not assets while they are still held within the plans.
Non-Qualified Retirement Plans
If you have assets in non-qualified deferred compensation plans, annuities or life insurance policies that you are saving for retirement, your creditor protection depends on state law. Some states provide unlimited creditor protection for assets in annuities and life insurance polices. In other states, the protection is more limited. If you have assets held in a workplace deferred compensation program, these assets belong to the company, and not you. Your personal creditors do not have recourse to these assets. But if the company goes bankrupt, these assets may be subjected to seizure by company creditors.
Divorce
While it is very difficult for most creditors to seize retirement assets to satisfy debts, former spouses have substantially more recourse, depending on state law. In the event of divorce, judges routinely divide retirement assets under a QDRO, or qualified domestic relations order. States that have adopted community property laws consider retirement assets to be owned 50/50 by both spouses -- at least to the extent these plans were funded during the marriage. Plans are also attachable in equitable property states.
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