Your IRA can be reached in a lawsuit, but usually only in specific circumstances. In federal bankruptcy, traditional and Roth IRAs are protected up to $1,711,975 through March 2028, and rollover, SEP, and SIMPLE IRAs get unlimited protection. Outside bankruptcy, whether a judgment creditor can touch your IRA depends on your state’s exemption law. And a handful of debts — federal taxes, divorce and support, criminal restitution — cut through the shield regardless.
What Bankruptcy Protects
Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, traditional and Roth IRA balances are exempt from the bankruptcy estate up to a combined cap. The base statutory figure is $1,000,000, adjusted for inflation every three years. From April 1, 2025 through March 2028, the cap is $1,711,975 across your combined traditional and Roth accounts.1Office of the Law Revision Counsel. 11 U.S. Code 522 – Exemptions
SEP IRAs, SIMPLE IRAs, and rollover IRAs holding funds that originated in an employer-sponsored plan like a 401(k) are not subject to that cap. They receive unlimited bankruptcy protection because the money came from ERISA-covered plans, which carry full federal creditor protection, and the shield travels with the funds.1Office of the Law Revision Counsel. 11 U.S. Code 522 – Exemptions
The catch on rollovers is tracing. The unlimited exemption only applies to dollars you can document as coming from the employer plan. If you mix rollover money with regular annual contributions in the same account, sorting out which is which becomes messy. Keeping rollover funds in a separate IRA from your personal contributions preserves the exemption cleanly.
What Happens Outside Bankruptcy
When a creditor sues you, wins, and tries to collect through garnishment or a bank levy — without any bankruptcy filing — federal bankruptcy law doesn’t apply. Your IRA’s protection comes entirely from your state’s exemption statute, and states take very different approaches.
- Unlimited protection. Some states shield IRAs completely from judgment creditors, similar to how ERISA treats employer plans.
- Capped protection. Others protect IRA funds only up to a fixed dollar amount that varies by state.
- Needs-based protection. A few states protect only the portion a judge finds reasonably necessary for the debtor’s retirement support, decided case by case.
The gap between a strong-protection state and a weak-protection state can be the difference between keeping your retirement savings and losing them. If you have significant IRA balances and any real lawsuit exposure, your state’s rule is worth knowing before a claim ever arrives.
Debts That Cut Through the Shield
Some obligations override both federal bankruptcy protection and state exemptions. Even a fully “protected” IRA is exposed to these.
Federal Tax Debts
The IRS can levy almost any property you own to collect back taxes, and retirement accounts are on the list. Under IRC Section 6331, after issuing notice and demand and waiting at least 10 days, the IRS can seize IRA funds.2Office of the Law Revision Counsel. 26 U.S. Code 6331 – Levy and Distraint Retirement accounts are named explicitly among the property types subject to levy.3Internal Revenue Service. What is a Levy? No state exemption or bankruptcy exemption blocks a federal tax levy on an IRA.
Divorce, Alimony, and Child Support
A court can divide IRA assets in a divorce settlement or to enforce child support and alimony. IRAs are not divided by a Qualified Domestic Relations Order — that mechanism applies only to employer-sponsored plans4Internal Revenue Service. Retirement Topics – QDRO: Qualified Domestic Relations Order — but the practical result is the same. A court directs a portion of the IRA to be transferred to a former spouse, and neither state exemptions nor bankruptcy protections stop it. Done correctly, the transfer isn’t treated as a taxable distribution to the original owner.
Federal Criminal Restitution
Federal courts can order restitution as part of a criminal sentence under the Mandatory Victims Restitution Act, compensating victims of certain crimes including crimes of violence and property offenses.5Office of the Law Revision Counsel. 18 U.S. Code 3663A – Mandatory Restitution to Victims of Certain Crimes The enforcement tools available to collect criminal restitution are broad, and courts have significant authority to reach a defendant’s assets.
Inherited IRAs Get Much Less Protection
An IRA you inherited from someone other than a spouse is treated very differently from one you funded yourself. In Clark v. Rameker (2014), the Supreme Court ruled unanimously that inherited IRAs are not “retirement funds” under the federal bankruptcy exemption. The Court pointed to three features: the beneficiary can’t add contributions, must take mandatory withdrawals regardless of age, and can drain the account at any time without the 10% early withdrawal penalty. Because the funds aren’t being held for the beneficiary’s own retirement, they don’t get the shield built for retirement savings. In federal bankruptcy, an inherited IRA is fully exposed.6Justia Supreme Court Center. Clark v. Rameker, 573 U.S. 122 (2014)
Outside bankruptcy, some states have filled the gap by statute. Texas, Florida, North Carolina, Ohio, Arizona, and Alaska specifically protect inherited IRAs from judgment creditors. Illinois and Oklahoma have declined to. If you’re holding a significant inherited IRA, the answer really is state-specific.
The 401(k)-to-IRA Rollover Trap
A 401(k) still inside an employer plan has unlimited federal creditor protection, both in and outside bankruptcy, under ERISA’s anti-alienation rules. Rolling that money into an IRA changes two things. In bankruptcy, the rolled funds keep unlimited protection only if you can trace them. Outside bankruptcy, you lose the ERISA shield entirely and drop back to whatever your state provides.
In a strong-protection state, this may not matter. In a weaker one, rolling a 401(k) into an IRA can expose hundreds of thousands of dollars that were previously untouchable. If you’re in a profession with real lawsuit exposure, a rollover into a new employer’s 401(k) preserves the full ERISA protection; a rollover into an IRA may not.
Ways People Forfeit Protection on Their Own
Prohibited Transactions
An account that stops being an IRA loses the special protections. That happens when the owner engages in a prohibited transaction — borrowing from the IRA, selling property to it, using it as loan collateral, or buying property for personal use with IRA funds are common examples.7Internal Revenue Service. Retirement Topics – Prohibited Transactions
The consequences are immediate. The IRA is treated as having distributed all its assets to you on the first day of the year the prohibited transaction occurred. Income tax comes due on the full balance, the 10% early withdrawal penalty may apply if you’re under 59½, and the account loses its tax-exempt status.7Internal Revenue Service. Retirement Topics – Prohibited Transactions Once it’s no longer a qualified IRA, it’s just another asset creditors can reach.
Fraudulent Transfers
Moving money into an IRA to hide it from a creditor you already owe, or one you see coming, is a fraudulent transfer. A bankruptcy trustee can reverse any transfer made within two years before a bankruptcy filing if it was made with intent to hinder or defraud creditors. For transfers to self-settled trusts and similar devices, the lookback runs ten years.8Office of the Law Revision Counsel. 11 U.S. Code 548 – Fraudulent Transfers and Obligations Outside bankruptcy, most states have adopted a version of the Uniform Voidable Transactions Act, giving creditors similar tools. Ordinary retirement contributions are protected. Last-minute contributions made to shelter assets from a known creditor are not, and attempting it can worsen your position by signaling bad faith to the court.