Are my retirement plans protected from creditors?

California residents who are experiencing financial struggles or debt may wonder what can happen to their retirement plans if creditors come calling. A retirement plan is something most people consider one of their most valuable assets. It provides a sense of security to know that after retirement, suitable funds will be available to meet basic needs and provide financial comfort.

Employer sponsored retirement plans

Most of us have retirement plans through our employers. The good news is that most retirement plans sponsored by employers are protected from garnishment by creditors through the Employee Retirement Income Security Act. If your retirement plan was created by your employer and adheres to federal guidelines related to retirement plans, it is likely protected.

The creditor protection in employer sponsored plans is often the result of an anti-alienation clause included in the plan. This clause states that the funds in your retirement plan are held by a third-party administrator or trustee until you have the legal right to withdraw them, which is usually at retirement age.

Since you do not have a legal right to withdraw the funds until retirement, they are not considered your assets until you retire. Therefore, creditors cannot take them to satisfy your debts.

There are some situations which may put your retirement accounts at risk. If you owe federal income tax, the Internal Revenue Service may use your retirement funds to satisfy the tax debt. Your retirement fund could also be used to pay for any federal criminal fines, or back due child support.

Non-employer sponsored plans

Individual retirement plans that are not set up by your employer generally do not qualify for protection under ERISA. However, this depends on the specific type of plan and other factors.

The laws surrounding the protection of retirement plans can be complex. A knowledgeable estate planning attorney can evaluate your retirement plans and provide helpful information and advice on protecting their value.