IRA protection from lawsuits and creditors varies by state, and the map only tells half the story. Federal bankruptcy law sets a nationwide floor: up to $1,711,975 in combined traditional and Roth IRA assets is shielded from creditors when you file, with unlimited protection for dollars rolled in from employer plans. Step outside a bankruptcy case, and the answer flips to state law, where protection ranges from total immunity to a judge deciding how much of your IRA you actually need to live on.
The Federal Bankruptcy Floor
When you file Chapter 7 or Chapter 13, the Bankruptcy Code exempts funds held in tax-exempt retirement accounts under Internal Revenue Code sections 401, 403, 408, 408A, 414, 457, and 501(a).1Office of the Law Revision Counsel. 11 USC 522 – Exemptions That covers everything from traditional IRAs to 401(k)s.
This protection applies even in states that have opted out of the federal exemption scheme. The 2005 Bankruptcy Abuse Prevention and Consumer Protection Act placed retirement funds in Section 522(b)(3)(C), outside the optional federal exemptions in subsection (d), so no state can strip that floor away from a filer.
For traditional and Roth IRAs, the exemption is capped. Section 522(n) sets the ceiling at $1,711,975 for cases filed on or after April 1, 2025, running through March 2028, and the number adjusts every three years.1Office of the Law Revision Counsel. 11 USC 522 – Exemptions The cap covers all your traditional and Roth IRAs added together, not each account separately. A bankruptcy judge can raise it “if the interests of justice so require,” but that’s rare.
One detail matters a lot if it applies to you: SEP IRAs and SIMPLE IRAs are not subject to the dollar cap. Section 522(n) excludes accounts under IRC sections 408(k) and 408(p), because those plans are employer-established. The result is unlimited bankruptcy protection for those accounts regardless of balance.
Rollovers From Employer Plans
Money you rolled from a 401(k), 403(b), governmental 457(b), or other qualified plan into an IRA does not count against the $1,711,975 cap. Section 522(n) excludes amounts attributable to eligible rollover contributions and their earnings.1Office of the Law Revision Counsel. 11 USC 522 – Exemptions Direct transfers between tax-exempt retirement accounts do not lose their exempt status because of the transfer.
The practical problem is tracing. If you drop a $500,000 rollover into the same IRA where you’ve contributed for twenty years, sorting which dollars are which becomes a headache when a trustee starts asking. Keeping rollover funds in a separate IRA from your contribution-funded account is the cleanest way to preserve the uncapped exemption.
Outside Bankruptcy, State Law Controls
When a creditor wins a civil judgment and moves to collect, state exemption law decides what they can touch. State law does not have to match the federal bankruptcy figure, and the variation is dramatic. State approaches generally sort into three categories.
- Some states shield IRAs entirely from civil judgment creditors, treating them much like ERISA-qualified employer plans.
- Others set a specific dollar limit that may be higher or lower than the federal bankruptcy cap.
- Several protect IRA funds only to the extent a judge finds them reasonably necessary for the debtor’s support in retirement. That standard leaves courts wide discretion, and a large balance is more likely to be partially exposed.
The same IRA can be untouchable in one state and significantly exposed in another. If you’re relocating, run the IRA protection question before you move, not after.
ERISA Plans Get Stronger Protection Than IRAs
Funds still sitting in an ERISA-covered employer plan — a 401(k), pension, or most 403(b) plans — receive broader protection than IRA funds under nearly every scenario. ERISA’s anti-alienation provision blocks creditors from reaching plan assets both inside and outside bankruptcy, with no dollar cap. IRAs lack that blanket federal shield because they’re individual arrangements outside ERISA.
This creates a rollover trap. If you have significant funds in an employer plan and live in a state with limited IRA protection, rolling those dollars into an IRA can actually reduce your protection outside bankruptcy. The rollover amount keeps its uncapped federal bankruptcy exemption, but a state-court judgment creditor is subject only to whatever your state provides for IRAs. Anyone with foreseeable legal exposure should think through this before initiating a rollover.
Inherited IRAs Are the Big Exception
The most important gap in IRA protection is inherited IRAs held by someone other than a surviving spouse. The Supreme Court in Clark v. Rameker (2014) held unanimously that inherited IRAs do not qualify as “retirement funds” under the Bankruptcy Code.2Justia U.S. Supreme Court Center. Clark v Rameker, 573 US 122 (2014) The Court’s rationale was that a non-spouse beneficiary cannot add to the account, must take required distributions regardless of age, and can withdraw the whole balance at any time without penalty.3Oyez. Clark v Rameker The account functions as accessible cash, not long-term retirement savings.
The consequence is direct. If you inherit an IRA from a parent and later file bankruptcy, that inherited IRA is available to your creditors under federal law. A surviving spouse can sidestep this by rolling inherited funds into their own IRA, converting the account into a standard IRA with full protection. Non-spouse beneficiaries cannot.
Some states have responded by enacting statutes that specifically shield inherited IRAs from creditors under state law. Those protections operate outside bankruptcy and can fill the gap federal law leaves. If you’ve inherited an IRA, checking your state’s rule is worth doing.
Creditors Who Get Through Anyway
Certain claims reach IRA funds regardless of exemption status, in bankruptcy and outside it.
The IRS has authority under IRC Section 6331(a) to levy “all property and rights to property” of a delinquent taxpayer, and IRAs are not on the exempt list in Section 6334. The Service tends to move on retirement accounts only in cases involving significant unpaid taxes, but the authority is there.
Child support and alimony obligations also cut through. The Bankruptcy Code provides that property exempted under Section 522 remains liable for domestic support obligations defined in Section 523(a)(5).1Office of the Law Revision Counsel. 11 USC 522 – Exemptions A bankruptcy filing does not block an ex-spouse’s claim for unpaid support.
Federal criminal restitution is another. Under 18 U.S.C. § 3613(a), the government can enforce a criminal fine or restitution order “notwithstanding any other Federal law,” which courts read to override the bankruptcy exemptions.
Divorce reaches IRAs directly. Unlike 401(k)s, which are split with a Qualified Domestic Relations Order, IRAs are divided per the divorce decree through a trustee-to-trustee transfer to the former spouse’s IRA. Whether your IRA is subject to division depends on state property rules: contributions and growth during the marriage are generally marital property, while premarital and inherited funds are typically separate. Community property states tend to divide marital assets equally; equitable distribution states divide based on what the court considers fair.
Ways an IRA Can Lose Its Protected Status
Protection lasts only as long as the account keeps its tax-exempt status. Three things can strip it.
A prohibited transaction between you (or a disqualified person such as a spouse, parent, child, or a 50%-owned entity) and the IRA disqualifies the account as of the first day of that tax year. The entire balance is treated as distributed on that date, triggering income tax and potentially early withdrawal penalties.4Office of the Law Revision Counsel. 26 US Code 408 – Individual Retirement Accounts Prohibited transactions include lending between you and the IRA, selling or leasing property to it, or using its assets for personal benefit.5Office of the Law Revision Counsel. 26 US Code 4975 – Tax on Prohibited Transactions Once the tax exemption is gone, the creditor protection that rides on it goes with it. There’s also a 15% excise tax that jumps to 100% if the transaction isn’t corrected within the taxable period.6Internal Revenue Service. Retirement Topics – Tax on Prohibited Transactions Self-directed IRA holders face the highest risk because they hold the keys.
Fraudulent transfers into an IRA can be undone. A bankruptcy trustee can avoid transfers made within two years of filing if they were made with intent to defraud creditors, or for less than reasonably equivalent value while the debtor was insolvent. For transfers into self-settled trusts made with actual fraudulent intent, the look-back is ten years.7Office of the Law Revision Counsel. 11 USC 548 – Fraudulent Transfers and Obligations Modest, steady contributions across many years read very differently from a large deposit made after you’ve been served with a lawsuit.
Commingling personal or business funds with IRA assets can also contaminate the account. If a court finds the funds were improperly mixed, the whole IRA can lose its protected status, not just the tainted portion. The risk is highest with self-directed IRAs, and clean segregated accounts with clear records are the basic defense.