Can Retirement Funds Be Garnished?
When you owe money to someone else, the creditor can take many assets away from you to satisfy the debt. However, many, but not all, types of retirement accounts are protected from seizure. You should know which of your assets are protected and which ones are not, as this may dramatically affect your future retirement plans.
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Types
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There are many types of retirement accounts that are protected from seizure. These retirement accounts are protected under the Employee Retirement Income Security Act. These retirement accounts include pension plans, 401k plans, 403b accounts and 412i plans. Under ERISA, no retirement account protected under the law is transferable to a third party. This means that the creditor cannot garnish your retirement account. An exception to creditor protections comes with individual retirement arrangements. An IRA is limited to bankruptcy protection under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.
Significance
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Because most retirement accounts are protected from garnishment, you are still allowed to contribute money to the account, so long as it is not done with the express purpose of defrauding creditors. You may invest the money already in your retirement account, where applicable, without worrying about the money being taken from you. With IRAs, the bankruptcy protection limit is $1 million. Anything over $1 million may be taken. Additionally, each state may differ in the protections afforded to IRAs for nonbankruptcy cases.
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Disadvantage
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The disadvantage, regardless of the type of retirement account involved, to the protections afforded to retirement plans is that your creditors might still be able to get your money anyway. Even though the retirement account is protected, your bank account is not. If you have your retirement income deposited into your checking account directly, then that bank account and all of the money in it may be taken from you to satisfy a debt.
Consideration
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To prevent money from being taken from you, you'd need to have actual checks given to you so that you may cash them yourself. By avoiding deposits to a bank account, you'll have some money to live on. However, a bank with a lien on it may be closed if the account is seized. If you must cash your checks with a bank where you do not have an account, you may be charged a fee for check cashing. If you cannot hold a bank account due to your creditor's collection attempts, you'll have to make payments to creditors or for your basic living expenses via cash or a money order.
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