Protecting Retirement

August 12, 2023


For those in California with a judgment against them, your judgment creditor creditor might be able to collect from some of your retirement accounts.

One of many judgment articles: I am a Judgment Broker, not a lawyer, and this article is my opinion based on my experience in California, please consult with a lawyer if you need legal advice.

Although some retirement accounts are protected (e.g., 401Ks and profit-sharing plans) because laws protect them; others (such as IRAs) may be vulnerable to judgment creditors.

The judgment creditor’s ability to levy a retirement account depends on what type of retirement account it is, the debtor’s situation, and the account balance.

One example of a protected retirement account is one protected by Federal (ERISA) Employee Retirement Income Security Act qualified retirement account-related laws.

Examples of protected ERISA-qualified pension plans and benefit plans include 401(K) accounts, group health and life insurance plans, pension and profit-sharing plans, HSAs, HRAs, disability, accidental death benefits, and vision and dental plans.

There are two kinds of creditors, mortals and (IRS tax, child or spousal support QDRO) creditors. When it comes to ERISA retirement accounts, IRS and family support judgment creditors have more rights than regular creditors.

California offers less protections for non-ERISA accounts. If your retirement account is not covered and qualified by ERISA, then your judgment creditors could potentially seize it.

Non-ERISA accounts that may be vulnerable include IRAs (both Roth and simple), Keogh and SEP plans, 403(b) plans for employees of a public utility or school, plans that do not benefit employees, employer-only plans, and church or government plans.

On the debtors (and their dependent’s) side are laws exempting the amount necessary for their support when they retire. That support amount is protected in their IRA and other non-ERISA accounts. The laws are not crystal clear, so different judges may rule differently on the same set of facts.

A court will decide how to divide a judgment debtor’s retirement account between them and the judgment creditor, based on the circumstances of the debtor. When considering a case, a California judge will consider many factors including:

1) Does the judgment debtor need any retirement funds now?

2) Will they be able to replenish the retirement funds if they are awarded to the judgment creditor?

3) The judgment debtor’s health and age.

4) The judgment debtor’s present and future income.

5) The debtor’s present and future living expenses.

6) The debtor’s ability to continue working and to earn money (including their skills and education level).

7) Any special needs of the debtor or their dependents.

8) The debtor’s ability to save more money for retirement.

A debtor example might be a $160,000 IRA. If the debtor is 39 years old, healthy and employed, has no dependents, and earns $68,000 a year; they may not be able to keep it. However, if they are 65 years old, have a heart condition, and are unemployed; they may be able to keep that same kind of account.

Also on the judgment debtor’s side, are the roll-over protection laws. If the judgment debtor rolls over funds from an ERISA account or a PRP (Private Retirement Plan) into their IRA, those funds will remain 100% exempt. If a judgment debtor is able to prove that the funds in their IRA originally came from an ERISA account or PRP, then the debtor can skip the “necessary for support” test.

California also offers protection for most private retirement plans. If the judgment debtor’s pension plan does not qualify under ERISA, but does qualify as a PRP, then it may be fully protected from creditors. Unlike with an IRA, again, the debtor can skip the “necessary for support” test.

To qualify, a PRP must be set up as an employment pension plan, with written rules restricting access to the funds, like an ERISA account.

The judgment debtor cannot deposit a single large lump sum of their own money or roll over their IRA funds into a PRP. If the debtors uses PRP funds prematurely and for non-retirement purposes (such as paying personal debts and expenses), then it may lose its exempt status.

One last option for judgment debtors is to file for bankruptcy protection. Bankruptcy laws may allow debtors to protect up to $1 million in their IRAs.

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