Yes, an IRA can be taken in a lawsuit, but whether a creditor actually reaches it depends on where you live, what kind of debt is involved, and how the account was funded. Traditional and Roth IRAs get strong protection in federal bankruptcy and varying protection under state law when a creditor sues you and tries to collect on a judgment. Several categories of debt cut through that protection entirely.
State Law Controls When a Creditor Sues You
If a creditor wins a lawsuit against you and tries to collect through garnishment or a bank levy, federal bankruptcy law doesn’t apply. Your IRA’s safety comes entirely from your state’s exemption statutes, and those statutes vary widely.
State protections generally fall into three groups:
- Unlimited protection. Some states shield IRAs completely from judgment creditors, treating them much like ERISA-covered plans.
- Capped protection. Other states protect IRA funds only up to a specific dollar amount, which varies by state.
- Needs-based protection. A few states protect only the amount a judge finds reasonably necessary for the debtor’s retirement support, decided case by case.
The type of IRA you hold can also matter. SEP and SIMPLE IRAs involve employer contributions, and some courts have treated them as ERISA plans. ERISA broadly preempts state laws that “relate to” employee benefit plans, but ERISA’s own anti-alienation rule doesn’t cover IRAs. In some jurisdictions this leaves SEP and SIMPLE IRAs with less protection than a regular traditional IRA, because the state exemption is preempted without a federal one taking its place. Courts have not been consistent, so the answer for SEP and SIMPLE IRAs outside bankruptcy is unsettled in several states.
Federal Bankruptcy Protection Is a Separate Track
Bankruptcy is a different proceeding with its own rules. Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, traditional and Roth IRA balances are exempt from the bankruptcy estate up to an aggregate cap. The base statutory amount is $1,000,000, and it adjusts for inflation every three years. The current cap, effective from April 1, 2025 through March 2028, is $1,711,975 for your combined traditional and Roth IRA balances.1Office of the Law Revision Counsel. 11 U.S. Code 522 – Exemptions
SEP IRAs, SIMPLE IRAs, and rollover IRAs holding funds originally from an employer-sponsored plan like a 401(k) receive unlimited bankruptcy protection. Those funds came from ERISA-covered plans, which carry full federal creditor protection, and they keep that protection when they move into an IRA.1Office of the Law Revision Counsel. 11 U.S. Code 522 – Exemptions
Rollover funds keep unlimited protection only if you can trace them. If you roll a 401(k) into a fresh IRA and never add personal contributions, tracing is simple. If you mix rollover money with your own contributions in the same account, proving which dollars came from the employer plan gets harder. Keeping rollover funds in a separate IRA from personal contributions is the cleanest way to preserve the unlimited exemption.
Debts That Reach Your IRA No Matter What
Even in states with generous protections, and even in federal bankruptcy, some debts cut through the shield around an IRA.
Federal Tax Debt
The IRS has broad authority to levy almost any property you own when you owe back taxes, and retirement accounts are not excluded. Under IRC Section 6331, after notice and demand and a wait of at least 10 days, the IRS can seize IRA funds to satisfy a tax debt.2Office of the Law Revision Counsel. 26 U.S. Code 6331 – Levy and Distraint The IRS lists retirement accounts explicitly among the types of property subject to levy.3Internal Revenue Service. What is a Levy? No state exemption and no bankruptcy protection stops a federal tax levy.
Divorce, Alimony, and Child Support
Courts can divide IRA assets in a divorce and can reach them to enforce alimony and child support. A Qualified Domestic Relations Order applies only to employer-sponsored plans, not to IRAs.4Internal Revenue Service. Retirement Topics – QDRO: Qualified Domestic Relations Order IRAs are divided instead through a “transfer incident to divorce” under a different tax code provision. The practical effect is the same: the court directs a portion of the IRA to the former spouse, and state exemption laws and bankruptcy protections don’t prevent it.
Federal Criminal Restitution
Federal courts can order restitution as part of a criminal sentence under the Mandatory Victims Restitution Act, requiring defendants to compensate 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 Federal law places these restitution orders alongside IRS levies and domestic support obligations as exceptions to anti-alienation protections for federal retirement accounts, and enforcement mechanisms for criminal restitution are broad.
Inherited IRAs Get Much Less Protection
An IRA you inherited from someone other than your spouse is treated differently. The Supreme Court held unanimously in Clark v. Rameker (2014) that inherited IRAs do not qualify as “retirement funds” under the federal bankruptcy exemption. The Court pointed to three features that set inherited IRAs apart from retirement savings: the beneficiary cannot add contributions, must take distributions regardless of age, and can drain the account at any time without the 10% early withdrawal penalty.6Justia Supreme Court Center. Clark v. Rameker, 573 U.S. 122 (2014) In federal bankruptcy, an inherited IRA is fully exposed to creditors.
Some states have filled the gap outside bankruptcy. Texas, Florida, North Carolina, Ohio, Arizona, and Alaska have enacted statutes that specifically protect inherited IRAs from judgment creditors. Others, including Illinois and Oklahoma, have declined to extend protection. If you’ve inherited a significant IRA, your state’s rule matters a great deal.
Ways You Can Forfeit Your IRA’s Protection
Prohibited Transactions
An account that stops being an IRA loses its creditor protections. That can happen if you engage in what the IRS calls a prohibited transaction. Common examples include borrowing from your IRA, selling property to it, pledging it as loan collateral, or using it to buy property for personal use.7Internal Revenue Service. Retirement Topics – Prohibited Transactions
The consequences hit immediately. If you or your beneficiary engages in a prohibited transaction at any point during the year, the IRA is treated as having distributed all its assets to you on the first day of that year. You owe income tax on the full balance, you may owe the 10% early withdrawal penalty 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 a creditor can reach.
Fraudulent Transfers
Moving money into an IRA to hide it from creditors when you already owe a debt or expect a lawsuit is a fraudulent transfer, and a bankruptcy trustee can claw it back. A trustee can reverse any transfer made within two years before a bankruptcy filing if it was done with the intent to hinder or defraud creditors. For transfers to self-settled trusts and similar devices, the lookback period runs ten years.8Office of the Law Revision Counsel. 11 U.S. Code 548 – Fraudulent Transfers and Obligations Outside bankruptcy, most states have adopted some version of the Uniform Voidable Transactions Act, which gives creditors similar tools. Ordinary retirement saving is protected. A last-minute effort to shelter assets from a known creditor is not, and attempting it can hurt your position with a judge.
Think Twice Before Rolling a 401(k) Into an IRA
A 401(k) held inside an employer plan has unlimited federal creditor protection both in and outside of bankruptcy, thanks to ERISA’s anti-alienation rules. Rolling that money into an IRA changes two things. In bankruptcy, the rollover dollars keep their unlimited exemption only if you can trace them back to the employer plan. Outside of bankruptcy, you lose ERISA’s blanket federal protection entirely and rely on whatever your state provides.
In a state with strong IRA protections, the practical difference may be small. In a state with limited or no IRA protections, the rollover can expose hundreds of thousands of dollars to judgment creditors that would have been untouchable inside the 401(k). If you’re in a profession with significant lawsuit exposure, rolling into a new employer’s 401(k) instead preserves the full ERISA shield.