Are IRAs in Illinois Exempt From Creditors?

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If you owe money to creditors and you stop making payments, you may wonder which of your assets they can seize. Creditors can take possession of most types of property. Specific regulations pertaining to creditors differ by state, but, in Illinois, the money contained in your individual retirement account (IRA) typically is exempt from seizure for unpaid debt.

About IRAs

  • An IRA is an account an individual uses to save money for retirement. Other retirement plans, such as 401k plans, may receive funds from employee and employer contributors. However, an IRA receives funds only from the owner. The owner can deposit as much as he wants into his IRA up to a set maximum. Contributions to a traditional IRA typically are tax-deductible. When the contributor withdraws money from the account in retirement, the government taxes it as income.

Illinois Law

  • If an Illinois court issues a judgment against you, a creditor can take possession of any of your non-exempt property, including real property, personal property, wages, vehicles and bank accounts. Most judgments last for seven years. Illinois doesn't allow creditors to take money from a debtor's exempt property, which includes life insurance, veteran's benefits, Social Security benefits, alimony, unemployment benefits, 401k plans, pension plans and IRAs.

Bankruptcy

  • The federal government considers IRAs exempt from bankruptcy. However, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 allows states to either use federal exemption guidelines for bankruptcy or create their own list of exemptions. At the time of publication, Illinois has chosen to use its own list of exemptions, but Illinois includes IRAs on this list and provides partial or full protection for IRAs during bankruptcy.

Inheritance

  • Though Illinois won't allow creditors to take possession of funds from an IRA you created, it may allow them to take funds from an IRA you inherited. Some states, including Minnesota, have determined that inherited IRAs deserve the same protection as regular IRAs. However, other states, including Texas and Illinois, have concluded that inherited IRAs are not exempt from creditors or bankruptcy proceedings. In these states, creditors can seize inherited IRAs.

Considerations

  • Though IRAs are exempt from garnishment from most creditors, the Internal Revenue Service can seize them for unpaid taxes. IRAs are also subject to garnishment for family maintenance payments, such as alimony or child support.

References

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