SoFi

There isn’t a simple yes or no answer as to whether your retirement accounts can be garnished. The Employment Retirement Income Security Act (ERISA) protects certain retirement accounts from garnishment if you’re sued by a creditor. The Act does not extend to non-qualified accounts like IRAs. However, those accounts do enjoy certain protections in bankruptcy.

The IRS may be able to garnish or take your 401(k) funds, however, if you owe back taxes. The IRS can also dip into your IRA or any self-employed retirement accounts you own to collect on a past due tax bill. If you’re worried about being sued by a creditor or running afoul of the IRS, it’s important to know when retirement accounts may be subject to garnishment.

What Does Garnishment Mean?

Garnishment is a legal process in which one entity takes money from another under the authority of federal or state law to satisfy a debt. Both wages and bank accounts can be subject to garnishment in connection with debt collection lawsuits. A court order may be necessary to enforce a garnishment agreement.

Federal law can limit which wages or bank account deposits are exempt from garnishment and under what conditions. For example, if you receive Social Security benefits, they may be exempt if you’re sued for unpaid credit card debt. Those benefits are not bulletproof, however. And ignoring how your funds could be imperiled could be a critical retirement mistake.

The Social Security Administration (SSA) can withhold some of your benefits if your state presents a garnishment order for unpaid alimony, child support, or restitution. The Treasury Department can also withhold some of your benefits to offset unpaid tax debts. Generally, a garnishment order cannot be lifted until the debt in question is satisfied.

Can Retirement Accounts Be Garnished?

Retirement accounts can be garnished but there are specific rules that apply in determining which accounts are subject to garnishment. This is where it’s important to understand the different types of retirement plans.

As mentioned, certain retirement accounts are protected by ERISA. They’re usually referred to as qualified retirement plans. Examples of ERISA plans include:

•   Profit-sharing plans

•   401(k) plans

•   Money purchase plans

•   Stock bonus plans

•   Employee stock ownership plans

•   Defined benefit plans, including pensions

Generally speaking, money held in ERISA plans are protected from garnishment by creditors. The amount you can protect is unlimited, so whether you’ve saved $1,000 or $1 million in an ERISA plan, it’s safely out of reach of creditors.

There is an exception made in cases where the account owner is ordered by a court to pay restitution to the victim of a crime. In that instance, a federal ruling has deemed it acceptable to allow garnishment of ERISA plans to make restitution payments.

Non-qualified plans are not covered by ERISA protections. Non-qualified plans can include deferred compensation plans and executive bonus plans, but traditional and Roth IRAs can also fall under this umbrella.

The good news is that state law can include provisions to protect IRAs from garnishment. So if you’re sued for a $20,000 credit card debt, your creditor might not be able to touch any money you’ve stashed in a traditional or Roth IRA. Federal law also protects your online IRA or other type of IRA from garnishments relating to unpaid debts if you file for bankruptcy protection.

Reasons Your 401(k) May Be Garnished

It’s not common for a 401(k) to be garnished, thanks to ERISA. But there are some scenarios where it can happen. Here are some of the reasons why a 401(k) can be garnished.

You Have a Solo 401(k)

A solo 401(k) or one-participant 401(k) is a type of 401(k) plan that’s designed for people who are self-employed or run a business and have just one employee who is their spouse. These plans are not subject to ERISA rules, so they could be vulnerable to creditors which may include garnishment for unpaid debt.

Even though a solo 401(k) isn’t protected at the federal level, your assets could still be safe under state law. As mentioned, many states exempt retirement accounts from creditor garnishments. The exemption limit may vary from state to state, though some states protect 100% of retirement assets.

You Owe Child Support or Alimony

If you’re ordered to pay child support or alimony and fail to do so, the court could order you to turn over some of your 401(k) assets to make those payments. If you’re getting divorced, then your spouse may be able to claim part of those assets as part of the settlement.

They’ll generally need a Qualified Domestic Relations Order (QDRO) to do so. This document directs the plan administrator on how to divide 401(k) assets between spouses, according to the terms set by the divorce agreement.

You Owe Restitution

As mentioned, retirement accounts can be garnished in cases where you’re ordered by a court to pay restitution to someone. For example, say that you were negligent and injured someone in a car accident. The court might order you to pay restitution to the injured person.

If you don’t arrange another form of payment, the court might greenlight garnishment of your 401(k). The amount that can be garnished must reflect the amount of restitution you were ordered to pay.

Can the Government Take My 401(k) or IRA?

The federal government, specifically the IRS, can garnish your retirement accounts. So when can the IRS take your 401(k) or IRA? Simply, if you owe unpaid tax debt and have made no attempt to pay it. Garnishment and property liens are usually options of last resort, as the IRS might give you an opportunity to set up an Installment Agreement or make an Offer In Compromise to satisfy the debt.

Before the IRS can garnish your retirement accounts for unpaid taxes, it has to provide you with adequate notice. That means sending a written letter that specifies how much you owe. If you don’t respond to this notice, the IRS will send out a final notice giving you an additional opportunity to pay your taxes or schedule a hearing.

Should you still do nothing, that opens the door for the government to garnish your 401(k), IRA, and other retirement accounts. Note that the IRS can also garnish your Social Security retirement benefits but not Supplemental Security Income (SSI) benefits.

State tax agencies can seek a judgment against you for unpaid debt. While they can obtain a court order requesting payment, they cannot force you to withdraw money from a retirement account to pay. You could, however, still be subject to wage garnishments or bank account levies.

What Happens When Your Retirement Account Is Garnished?

When a retirement account is garnished, money is withdrawn and handed over to the recipient, which may be a creditor or the government. At that point, there may be nothing you can do to get that money back.

You should receive notification of the garnishment before it happens. That can give you time to make alternate arrangements to pay the debt. You could try to do that after the garnishment moves ahead, though it might be difficult to retrieve the money.

For example, if your 401(k) is garnished to pay back taxes you could contact the IRS to see if you might be able to reverse it by paying the tax debt, setting up a payment plan, or negotiating an Offer In Compromise. You could also attempt to make a claim for financial hardship which may help you to get the garnishment reversed.

Tips for Avoiding 401(k) Garnishment

Having your retirement accounts garnished can be unpleasant to say the least and it’s best avoided if possible. If you’re concerned about your 401(k) or other retirement accounts being garnished, here are some things you can do to try and prevent that from happening.

Pay Your Taxes on Time

One of the simplest ways to avoid a garnishment is to pay your federal taxes on time. If you’ve filed your return but you don’t have the money to pay what’s owed in full, you can potentially work out a payment agreement with the IRS, take out a loan, or charge it to a credit card.

You could also borrow from your 401(k) to satisfy unpaid tax debts. Using your 401(k) to pay down debt is usually not advised, since it can shrink your overall wealth and you might face tax penalties. However, you may prefer it to having the money taken from your account by the IRS.

Don’t Ignore IRS Notices

If the IRS sends you a letter requesting payment for unpaid taxes, don’t ignore it. Doing so could lead to a garnishment if the government makes additional attempts to get you to pay with no success. If you’re questioning whether the amount is accurate you may want to contact the IRS for verification or consult with a tax attorney.

Keep Up With Domestic Support Payments

When you’re ordered by a judge to pay child support or alimony, it’s important that you make those payments in a timely manner. As with back taxes, failing to pay could result in your 401(k) being garnished to satisfy the terms of the order in keeping with the divorce agreement or decree.

The Takeaway

There are certain retirement mistakes that are best avoided and having your savings garnished is one of them. Knowing when retirement accounts can be garnished can help you to preserve your assets.

Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

FAQ

Can the government legally take your 401(k)?

The federal government can garnish your 401(k) if you owe unpaid tax debts and all other attempts at collection have been unsuccessful. The IRS can also place levies against your property, including homes, vehicles, and other assets to force you to pay what’s owed.

Can a 401(k) be garnished by the IRS?

Yes, the IRS can garnish your 401(k) if you don’t pay federal taxes. Generally, the IRS will give you sufficient notice beforehand so that you have time to either pay the taxes owed or make alternate arrangements for handling your tax bill.

How do I protect my 401(k) from the IRS?

The simplest way to protect a 401(k) from the IRS is to pay your federal taxes on time and not disregard any notices or requests for payment you receive from the government. If you can’t pay in full, you might be able to set up a payment plan or an Offer In Compromise to avoid 401(k) garnishment.

Photo credit: iStock/Charday Penn

SoFi Invest®