In the case of federal debts, such as unpaid taxes due to the IRS, your IRA can be garnished or garnished to pay it off, just like any other asset. Retirement accounts established under the Employee Retirement Income Security Act (ERISA) of 1974 are generally protected against seizure by creditors. ERISA covers most employer-sponsored retirement plans, including 401 (k) plans, pension plans, and some 403 (b) plans. Even if you have accumulated millions of dollars in your retirement account and owe money or have filed for bankruptcy, creditors cannot access funds from these plans that meet the requirements of ERISA.
Individual retirement accounts aren't completely safe from lawsuits. While the federal government provides special protections for company-sponsored 401 (k) plans, each state has its own rules for IRAs. Many states allow a judge to determine how much can be awarded in a court ruling based on a person's retirement plan. The amount may vary depending on the judge.
When the creditor is the IRS, nothing is safe. The IRS has the authority to garnish 401 (k) plans, IRAs, Social Security benefits and pension benefits. In most cases, the IRS will search for retirement plans when all other means of collecting the money owed have been exhausted. Keep in mind that the IRS can only access retirement money that is available.
If the taxpayer doesn't have access to the money, the IRS can't get it either. But once that money is available, the IRS has the first right to access the money. For example, if you leave an employer offering a qualified plan, transferring assets from a qualified plan, such as a 401 (k), to an IRA may have implications for asset protection. That is, if you plan to leave at least part of your IRA to your family, in addition to your spouse, your beneficiaries' creditors may not be able to protect your assets.
However, determining whether your IRA will be protected from creditors who are not bankrupt will largely depend on state law. In addition to a partial bankruptcy exemption, there are no federally required exemptions from the IRA garnishment. The following table will provide a summary of the state protection that IRAs, including self-directed IRAs, receive from creditors outside the context of bankruptcy. If you want to learn more about Asset %26 creditor protection for a self-directed LLC IRA, let the specialists at IRA Financial Group help you today.
However, you can likely protect the IRA assets that you plan to leave to your family, other than your spouse, by ceding an IRA to a trust. That's why it's important to protect your IRA funds from creditors, including people who have won lawsuits against you. Another exemption applies to the amount of your IRA deemed necessary to support you, your spouse, and your dependents. For example, if you use a self-directed IRA LLC to make investments, you'll have better asset and creditor protection than if you made the investment yourself.
Any distribution of your IRA before you turn 59 and a half is usually subject to a 10% tax penalty.