A creditor has limited rights to garnish your earnings from a retirement fund or pension, including a 401(k) account. Federal and state laws usually prevent a creditor from pursuing a retirement account to pay a delinquent debt. These laws, however, may not provide the same protection if a debtor's creditor is the federal government or a state agency.
Unsecured Debts
Federal law usually bars unsecured creditors, including credit card and medical bill creditors, from garnishing a retirement account to satisfy debts. Even if creditors win court judgments against you, the court will not process garnishment orders to take money from your 401(k) and the investment firm holding your money does not legally have to answer any request for garnishment from your creditors. This regulation applies before or after your 401(k) matures and you begin withdrawing funds from the account in retirement.
Why Retirement is Exempt
Federal and state governments exempt retirement funds, including your pension or 401(k) account, from garnishment to pay most debts because both governing bodies do not consider retirement pay as earned income. Most creditors can only use garnishment to attach wages earned from working, which excludes retirement pay. Creditors may attempt to garnish your wages if you have a job while also drawing payments from your 401(k) or pension fund, though any money you receive from this retirement account remains exempt.
Back Taxes and Alimony
If your creditor is the federal government or an ex-spouse, the court may issue an order for garnishment of your retirement accounts, including your 401(k). The IRS may even move to garnish your retirement accounts and seize money from your bank accounts without a court's permission or a formal hearing. Your ex-spouse may sue you to recover unpaid portions of court-ordered alimony from a divorce settlement. If the court finds in your ex-spouse's favor, the court will issue an order for garnishment enabling your ex-spouse to access your retirement accounts.
Delinquent Child Support
Falling behind on your child support payments may enable the state to move to garnish your retirement accounts, including your 401(k), to bring your payments current. Your retirement accounts can typically be garnished for child support, back taxes and alimony. This may include a freeze of your existing bank accounts so the court can access your finances and withdraw the necessary funds to satisfy your child support obligations.
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