Although 401(k)s and other retirement savings accounts covered by ERISA are immune to garnishment, IRAs are not. In most states, a judge can take your IRA to get money for child support or other debts. There are some rare cases in which a parent who owes child support won't have their IRA frozen.

Whether or whether an individual's IRA is protected against garnishment is a question primarily of the jurisdiction where the account is held. The federal government has implemented an exclusions system, but individual states have the option of adopting these criteria or creating their own. The significant differences in protections enjoyed by citizens across the country can be traced back to the fact that most states prefer to develop their exemption regimes.

Laws at the federal level with some exceptions

Unless the account holder files for bankruptcy, federal law protects IRA funds. With the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) in 2005, your IRA savings of up to $1 million are protected from being lost in a bankruptcy filing; this amount is reviewed every three years and may be increased or decreased as required.

On the other hand, each state has its own set of laws regarding bankruptcy. The BAPCPA $1.3 million exemption is not available unless the state in which you reside allows you to choose between the state-specific and federal exemption systems.

Despite this safeguard, IRAs can be garnished to pay for any federal liability, including taxes owed. Several states do not allow their residents to choose between state and federal exemptions.

State-by-state exemptions

However, IRAs in most states offer little to no security from debt collectors. For example, IRA contributions made more than 120 days before a bankruptcy filing are safe in several states. Creditors in Minnesota can only access IRAs with a $75,000 balance or more.

Your IRA may be exempt from garnishment up to the point when the money inside of it is used to meet your basic needs and those of your dependents. The amount of an IRA that can be used as proof of financial need is, however, capped by several states.

Many states do not recognize the protection of such funds against domestic relations judgments, even if your IRA may be shielded from creditors by several exemptions. Child support wage garnishment is the most common exception to these protections. Many states can access a parent's IRA to collect child support, including Kentucky, Colorado, Wisconsin, and Louisiana. Most alimony, divorce, annulment, and legal separation judgments are not exempt under the rules of most states.

Which states don't seize IRAs for child support purposes?

Kansas, Connecticut, and Illinois are the few states offering complete protection for IRAs. If you owe child support yet have an IRA, the court may not be able to collect the money from your account.

Can I be forced to liquidate my IRA to satisfy a judgment? Federal law does not protect IRAs from creditors unless in the event of bankruptcy, and even then, only up to $1,362,800 as of 2021. The government may seize your IRA if you owe back taxes to the IRS. The federal government has less authority than the states regarding garnishing IRAs to pay off debts. In general, the rules are very flexible.

Bankruptcy Discharge

For this reason, people on the verge of insolvency may be tempted to put all their remaining funds into an IRA. To deter such fraudulent use, the exemption for IRAs was restricted in 2005 to $1 million, subject to revision every three years under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.

Partial Aid to Various Nations

States may use the federal exemption structure or create their own. Therefore the specific exemptions for IRA garnishment might vary widely. An individual's 401(k) or IRA can be protected from the claims of any creditor, not just the government. New York is one of the states that fully shields IRAs against garnishment by non-federal sources.

In some countries, IRAs are exempt from taxes. Typically, the exemption will only apply to funds deposited more than 120 days before the bankruptcy filing. Your IRA is tax-free up until the point where you, your spouse, and your dependents no longer require assistance from the government. In some states, such an amount may be restricted by legislation, whereas in others, no such restrictions exist. If the account holder is behind on a domestic relations debt decision, the money in their IRA may be subject to seizure by the court in most states.