First, we must distinguish an IRA - an individual retirement account - from other types of retirement plans. An IRA - by definition - is for an individual. IRAs (whether regular or Roth) are subject to their own creditor protection rules both under Federal bankruptcy law and - at least in California - under state law. For example, the Federal 2005 Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 provides a $1,000,000 exclusion (protection) for IRAs. By contrast, under California (state) law, IRAs are only protected to the extent that the debtor actually needs the funds for retirement. In other words, whether or not the funds are protected under California law depends upon what the judge believes. That is a risk most people would prefer not to take.
Non-IRA Retirement Plans: Governmental Plans
After discussing IRAs, we must distinguish among "other retirement plans." Retirement plans sponsored by tax-exempt entities, usually governments, have their own special status under Federal bankrutpcy law: they are protected in unlimited amounts. They do not have such status under California (state) law; they are lumped together with the retirement plans sponsored by regular (for profit) businesses.
All Other Non-IRA Retirement Plans: Bankruptcy vs. Non-Bankruptcy
Does the creditor's claim arise in bankruptcy? Or in a state lawsuit?
If the creditor's claim arises in a bankruptcy, the retirement plan is protected in an unlimited amount if it is "ERISA qualified." (ERISA stands for the "Employee Retirement Income Security Act of 1974.) The U.S. Supreme Court first used that phrase in its 1992 Patterson v. Shumate (540 U.S. 753) decision. Unfortunately, the phrase - ERISA qualified - has never been defined. The best guess is that it means that the retirement plan is (i) sponsored by a corporation and (ii) has rank and file employees as participants. In other words, if Joe Jones is the sole shareholder of Jones, Inc., then his secretary must be a participant (must have a vested interest) in the Jones, Inc. Retirement Plan for Joe's interest to be protected under ERISA. For his secretary to count as a "rank and file" participant, she cannot be a shareholder and she cannot be his spouse. She can, however, be his adult child.
Even A Federally Protected Retirement Plan Has 3 Exceptions
Joe Jones, in our previous example, was smart: his retirement plan is sponsored by a corporation and he has a non-spouse (non-shareholder) as a participant in the plan. Therefore, his retirement plan is "ERISA qualified." We know that "ERISA qualified" is the highest level of protection available to a retirement plan under Federal law. However, there are three exceptions, three types of creditors who can, nonetheless, get his retirement benefits. Who are these preferred creditors?
Number 1: the United States government. This exception is often misunderstood as being "the IRS." It is not limited to the IRS. If Joe owes money to the Federal Trade Commission, the FTC can satisfy its judgment out of Joe's retirement plan. Note: the state is not a preferred creditor, so the California Franchise Tax Board cannot collect unpaid state taxes from Joe's retirement plan.
Number 2: an order for spousal support.
Number 3: an order for child support.
Federal Protection For Retirement Plans Is Shockingly Strong!
In one case a retirement plan participant killed someone. The victim's family got a $30,000,000 civil judgment against the killer. However, they were unable to collect against the killer's retirement plan. That shows how strong retirement plan protection is. (Hint: O.J.)
In another case a union pension plan official defrauded the union of millions of dollars. The union got a judgment against the official for the money stolen. The union tried to offset its loss against the union official's pension benefits. The Federal court denied the union's claim because the retirement plan was "ERISA qualified."
State Law Protection Of Retirement Plan Assets
Each state has its own rules. Therefore, you must contact a competent lawyer in your own state.
In California, IRAs and Keoghs (self-employed retirement plans) are only protected to the extent that a judge determines you need the money for retirement (for you and your dependents). How much might that be? Is $500,000 too much because you are 45 and can earn it back? In other words, having money in an IRA in California is inherently risky.
By contrast, in California, having money in a plan sponsored by a corporation - probably one which covers rank and file participants (as described above as needed to be an "ERISA qualified" plan) - is exempt no matter the dollar amount. Also, once the participant dies, the retirement plan is still exempt for the participant's beneficiary. Even better: the payments, when received by the participant or beneficiary, continue to be exempt in the recipient's bank account.
Conclusion: Retirement Plan Assets Are Great For Creditor Protection
Retirement plan assets have a special place in creditor protection. The amount - the value - that can be protected from creditors can be unlimited. However, you have to follow the rules.