Retirement creditor protection starts with ERISA, ends with state law

Which retirement money belongs to the client and which to the creditors depends on two separate questions: who is claiming the money, and what kind of account it sits in. Ed Slott's IRAHelp sorts through the rules in a new explainer on creditor protection.

The first question splits creditors into two buckets. Bankruptcy creditors are the ones you owe after a filing; general creditors hold a court judgment and collect outside bankruptcy. The distinction is not academic. The two creditor types follow entirely different legal regimes, and a retirement account can be fully shielded from one while exposed to the other.

The interplay matters. A client who files for bankruptcy may find retirement money completely safe, while a client who loses a malpractice suit in a weak-protection state may see an IRA reached by a judgment creditor. The two threats are not equally likely, but both are possible. The rules give bankruptcy creditors the lesser claim, in a sense, because federal law protects far more retirement money from them than state law protects from general creditors.

The second question splits accounts into ERISA plans and everything else, with IRAs in a third bucket entirely. ERISA-covered workplace plans offer the strongest protection. Their assets are completely shielded from both creditor types, with one carve-out: the IRS can tap them for unpaid taxes. For a client in a conventional 401(k), creditor protection is a solved problem.

Non-ERISA plans — government plans, church plans, some small-business arrangements — do not get that sweeping shield. The federal Bankruptcy Code still gives them complete protection against bankruptcy creditors. Against general creditors, protection depends on the client's state. Some states mimic ERISA; others leave the money exposed. That creates a gap: a client with a non-ERISA plan can have full bankruptcy protection and no judgment protection at the same time.

Traditional and Roth IRAs sit outside ERISA entirely. In bankruptcy, they are protected up to $1,711,975, an inflation-adjusted cap. Rollovers from employer plans do not count against that cap, so a client can hold a large rollover balance and still have the full limit available for direct contributions and earnings. A client with a $2 million rollover IRA, for example, would not consume any of the cap with that money; the full $1.7 million shield is available for other IRA assets. The practical effect is that the cap is more generous than it looks for clients who have changed jobs and rolled money into an IRA.

Against general creditors, IRAs fall back on state law. Some states protect IRAs completely, whatever the size. Others cap the protection or leave it thin. The location of the money and the location of the lawsuit determine what survives. The split means an IRA that is untouchable in one state can be reachable across the border, a planning variable for clients considering a move in retirement.

SEP and SIMPLE IRAs occupy a middle tier. They have complete protection from bankruptcy creditors but may have none at all from general creditors, according to the explainer. The article says those accounts will get a fuller treatment later, which suggests the exposure is worth tracking.

For the advisor, the rules translate into a practical checklist. A client who is phasing out of a business, facing a liability, or considering a move across state lines deserves a specific answer about what is shielded and what is not. The answer requires knowing the client's plan type, the client's IRA composition, and the client's state of residence. The article does not rank the states, so the state-law portion of the analysis is homework.

The planning takeaway: ERISA is the strongest shield, bankruptcy law covers the non-ERISA gap, and state law decides the rest. The client's zip code becomes a planning variable. That conversation belongs before a judgment arrives, because once a creditor has a claim, the options get narrower. The tax code already shapes where retirement money lives; the creditor rules determine how much of it survives contact with an adverse verdict.