IRA Protection From Lawsuits and Creditors by State

IRA protection from lawsuits and creditors runs on two separate tracks. In a bankruptcy case, federal law shields traditional and Roth IRA balances up to $1,711,975, with unlimited protection for money rolled in from employer plans. Outside bankruptcy, when a creditor with a civil judgment tries to collect, protection depends almost entirely on your state, and the range across states is wide.

What Bankruptcy Protects

When you file Chapter 7 or Chapter 13, the Bankruptcy Code treats funds in tax-exempt retirement accounts as protected property. The exemption covers accounts qualifying under Internal Revenue Code sections 401, 403, 408, 408A, 414, 457, and 501(a), so traditional IRAs, Roths, 401(k)s, and 403(b)s are all included.¹

This protection applies even if you live in a state that has opted out of the federal exemption list. The 2005 Bankruptcy Abuse Prevention and Consumer Protection Act placed retirement funds in a standalone category under Section 522(b)(3)(C), sitting outside the optional federal exemptions. No matter where you file, your IRA gets at least the federal floor.

The Dollar Cap on Traditional and Roth IRAs

Section 522(n) caps the total exemption for traditional and Roth IRA assets at a figure that adjusts every three years. For cases filed on or after April 1, 2025 and running through March 2028, the cap is $1,711,975.¹

The cap applies to your traditional and Roth IRAs combined. Three Roths and two traditional IRAs are added together, and a single ceiling applies to the total. A bankruptcy judge can raise the limit “if the interests of justice so require,” but that is a high bar and rarely invoked.¹

SEP IRAs and SIMPLE IRAs are not subject to this cap. The statute excludes accounts described under IRC sections 408(k) and 408(p) from the cap calculation, because those plans are established by employers. They receive unlimited bankruptcy protection regardless of balance.¹

Rollover Dollars Don’t Count Toward the Cap

If you rolled funds from a 401(k), 403(b), governmental 457(b), or other qualified employer plan into a traditional or Roth IRA, those dollars and their earnings sit outside the $1,711,975 cap. Section 522(n) specifically excludes amounts attributable to eligible rollover contributions.¹

The catch is documentation. You need to be able to trace which dollars came from the employer plan and which came from your own annual IRA contributions. If a $500,000 rollover has been sitting in the same IRA where you’ve made contributions for 20 years, proving which funds are which becomes difficult. Keeping rollover money in its own IRA, separate from any contribution-funded account, is the cleanest way to preserve the unlimited exemption.

Protection Outside Bankruptcy Depends on Your State

Once you step outside federal bankruptcy, IRA protection is governed entirely by state law. When a creditor wins a civil judgment and tries to seize assets, the state’s exemption statutes decide what is off-limits. State law does not have to match the federal bankruptcy exemption, and the variation is dramatic.

State approaches generally fall into three patterns:

Unlimited protection. A handful of states shield IRAs entirely from civil judgment creditors, treating them similarly to ERISA-qualified plans.
A dollar cap. Some states set a specific ceiling on the IRA assets a debtor can protect. The cap may be higher or lower than the federal bankruptcy figure.
Reasonably necessary for support. Several states protect IRA funds only to the extent a judge finds them necessary for the debtor’s basic living needs in retirement. Larger balances are more likely to be partially exposed under this standard.

The same account can be fully immune in one state and significantly exposed in another. If you’re relocating, the change in IRA protection is worth investigating before you move.

Inherited IRAs Are a Major Gap

The biggest exception to IRA protection involves inherited IRAs held by someone other than a surviving spouse. In Clark v. Rameker (2014), the Supreme Court ruled unanimously that inherited IRAs do not qualify as “retirement funds” under the Bankruptcy Code.²

The Court pointed to three features that separate an inherited IRA from one you fund yourself. The beneficiary cannot add money to the account, must take a minimum distribution every year regardless of age, and can pull out the entire balance at any time without an early withdrawal penalty.³ Because the money functions as an immediately accessible pot of cash rather than a long-term retirement vehicle, it does not receive the same protection.

If you inherit an IRA from a parent and later file for bankruptcy, that account is available to your creditors under federal law. A surviving spouse can roll inherited funds into their own IRA and convert the account into a standard IRA with full protection. Non-spouse beneficiaries cannot. Several states have responded to Clark by passing legislation that protects inherited IRAs from creditors under state law, which applies outside bankruptcy. If you’ve inherited an IRA, checking your state’s rule is one of the more consequential pieces of financial homework you can do.

Creditors Who Can Reach an IRA Anyway

Some creditors bypass IRA protection entirely, in both bankruptcy and non-bankruptcy contexts.

The IRS

Under IRC Section 6331(a), the IRS can levy “all property and rights to property” belonging to a taxpayer with unpaid federal taxes. IRAs are not among the property types exempt from levy under Section 6334. The IRS tends to exercise restraint with retirement accounts in practice, but the legal authority to seize IRA funds exists and is used in cases involving significant unpaid taxes.

Child Support and Alimony

The Bankruptcy Code provides that property exempted under Section 522 remains liable for domestic support obligations as defined in Section 523(a)(5).¹ Filing for bankruptcy does not shield your IRA from an ex-spouse’s claim for unpaid child support or spousal maintenance.

Criminal Restitution

Under 18 U.S.C. § 3613(a), the federal government can enforce a criminal fine or restitution order “notwithstanding any other Federal law,” which courts have read to include the bankruptcy exemptions. An IRA is not a safe harbor from criminal restitution.

Divorce

Divorce reaches IRA funds directly, though the mechanics differ from a creditor action. IRAs are not divided through a Qualified Domestic Relations Order the way 401(k)s are. Instead, the divorce decree or settlement agreement directs a trustee-to-trustee transfer into an IRA in the former spouse’s name. Contributions and growth during the marriage are generally treated as marital property subject to division. Funds contributed before the marriage or inherited during it are typically separate property, though treatment varies by state.

How You Can Lose Protection Yourself

Protection lasts only as long as the IRA keeps its tax-exempt status. Several missteps can strip that status away and leave the whole account exposed.

Prohibited Transactions

If you or a disqualified person engages in a prohibited transaction with your IRA, the account stops being an IRA as of the first day of that tax year. The entire balance is treated as distributed to you on that date, triggering income tax and potentially early withdrawal penalties.⁴ Once the account loses tax-exempt status, the basis for creditor protection is gone with it.

Prohibited transactions include lending money between you and your IRA, selling or leasing property to it, or using its assets for your personal benefit.⁵ The circle of disqualified persons extends beyond you: your spouse, your parents, your children and their spouses, and any entity you or these family members control with 50% or more ownership. Self-directed IRA owners are particularly exposed because they can invest in alternative assets where the lines are easier to cross. Uncorrected prohibited transactions also carry an IRS excise tax that runs 15% of the amount involved and can climb to 100% if not fixed within the taxable period.⁶

Fraudulent Transfers

Moving substantial assets into an IRA specifically to shelter them from known or foreseeable creditors can be unwound by a court. Under the Bankruptcy Code, the trustee can avoid transfers made within two years before the filing date if 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 reaches ten years.⁷

Timing and size matter. Steady, modest IRA contributions over many years look very different from a sudden $50,000 deposit made after you’ve been served with a lawsuit. The first is retirement saving. The second invites scrutiny.

Commingling

Mixing personal or business funds with IRA assets can contaminate the account’s tax-exempt status. The risk is highest with self-directed IRAs, where the owner has direct control over investments and banking. If a court finds improper commingling, the entire account can lose protected status, not just the commingled portion.

A Rollover Planning Point

Funds still sitting in an employer-sponsored plan covered by ERISA (a 401(k), pension, or most 403(b) plans) get stronger protection than IRA funds under almost every scenario. ERISA’s anti-alienation provision blocks creditors from reaching plan assets both inside and outside bankruptcy, with no dollar cap. IRAs lack this blanket federal shield because they are not ERISA plans.

If you’re facing potential legal liability and have money in an employer plan, rolling it into an IRA could actually reduce protection in a state that offers limited IRA exemptions outside bankruptcy. The rollover dollars keep their unlimited bankruptcy exemption, but outside bankruptcy they get whatever your state provides for IRAs rather than the broader ERISA protection. For anyone with meaningful employer plan balances and foreseeable legal exposure, this is worth thinking through before initiating a rollover.

1
Office of the Law Revision Counsel. 11 USC 522 – Exemptions
2
Justia U.S. Supreme Court Center. Clark v Rameker, 573 US 122 (2014)
3
Oyez. Clark v Rameker
4
Office of the Law Revision Counsel. 26 US Code 408 – Individual Retirement Accounts
5
Office of the Law Revision Counsel. 26 US Code 4975 – Tax on Prohibited Transactions
6
Internal Revenue Service. Retirement Topics – Tax on Prohibited Transactions
7
Office of the Law Revision Counsel. 11 USC 548 – Fraudulent Transfers and Obligations