How retirement plan accounts are generally protected from creditors

The Employee Retirement Income Security Act (ERISA) keeps qualified plans and welfare benefits, such as health savings accounts, out of reach of creditors in most circumstances, mainly because of the anti-alienation clause, which states that your rights to the benefits can’t be taken away. 401(a) profit-sharing, 401(k), 403(b), nongovernmental 457, defined benefit, and SIMPLE 401(k) plans, as well as SIMPLE and SEP IRAs, are generally out of reach of creditors—with four exceptions:

  1. Payments awarded to a former spouse or other alternate payee under a qualified domestic relations order
  2. A lien imposed by the IRS for nonpayment of taxes
  3. Federal criminal fines or penalties
  4. Civil or criminal judgments for damage a participant caused to a retirement plan

Once assets are withdrawn from an ERISA-qualified plan, they lose the shield provided by this federal law. The one exception is assets in an IRA that consist of only qualified plan rollover money—those assets remain safeguarded from creditors, but protection is under federal bankruptcy law. 

IRAs also offer protection from creditors—but with limits

IRAs are protected from creditors by federal bankruptcy law under the following circumstances:

  • If the entire IRA balance came from a qualified plan rollover
  • For an amount up to $1,362,800 (as of 2019 and indexed for inflation every three years thereafter) for deductible and Roth IRA contributions and earnings on those contributions; this amount doesn’t include employer plan rollovers  

Inherited IRAs—those received by a client as a beneficiary of an account—are not protected from seizure under federal law, although some states may offer protection.

State laws govern protection from creditors in IRAs, but they vary from state to state. IRA account holders should check with the state in which they reside to learn about specific creditor protections offered by their state (source: retirement. John

Retirement Strategies for Small Business Owners



A SIMPLE IRA is a retirement savings plan that most small businesses with 100 or fewer employees can use.

Employers can choose to make a non-elective contribution of 2% of the employee’s salary or a dollar-for-dollar matching contribution of the employee’s contributions to the plan up to 3% of their salary.

Employees can contribute a maximum of $15,500 annually in 2023. The maximum is increased periodically to account for inflation. Retirement savers ages 50 and older may make an additional catch-up contribution of $3,500, bringing their annual maximum to $19,000 in 2023 (source: plans).

Example*: Elizabeth works for the 2:3 Rule Interior Design Company, a small business with 10 employees. 2:3 Rule Interior Design has decided to establish a SIMPLE IRA plan for its employees and will match its employees’ contributions dollar-for-dollar up to 3% of each employee’s compensation. Under this option, if an employee does not contribute to his or her SIMPLE IRA, then that employee does not receive any matching employer contribution.

Elizabeth has a yearly compensation of $50,000 and contributes 5% of her compensation ($2,500) to her SIMPLE IRA. The Rockland matching contribution is $1,500 (3% of $50,000). Therefore, the total contribution to Elizabeth’s SIMPLE IRA that year is $4,000 (her $2,500 contribution plus Rockland’s $1,500 contribution). The financial institution holding Elizabeth’s SIMPLE IRA has several investment choices and she is free to choose which ones suit her best (source: plans).

SEP IRA: A simplified employee pension (SEP) is another type of individual retirement account (IRA) to which small business owners and their employees can contribute. In 2023, it lets employees make pretax contributions of up to 25% of income or $66,000, whichever is less. Like a SIMPLE plan, a SEP lets small business owners make tax-deductible contributions on behalf of eligible employees, and employees won’t pay taxes on the amounts an employer contributes on their behalf until they take distributions from the plan when they retire (source: plans).

SOLO 401(k): The one-participant 401(k) plan isn’t a new type of 401(k) plan. It’s a traditional 401(k) plan covering a business owner with no employees, or that person and his or her spouse. These plans have the same rules and requirements as any other 401(k) plan.  Elective deferrals up to 100% of compensation (“earned income” in the case of a self-employed individual) up to the annual contribution limit: $22,500 in 2023, or $30,000 in 2023 if age 50 or over; plus Employer nonelective contributions up to 25% of compensation as defined by the plan, or for self-employed individuals.

Example*: Ben, age 51, earned $50,000 in W-2 wages from his S Corporation in 2022. He deferred $20,500 in regular elective deferrals plus $7,000 in catch-up contributions to the 401(k) plan. His business contributed 25% of his compensation to the plan, $12,500. Total contributions to the plan for 2022 were $38,500. This is the maximum that can be contributed to the plan for Ben in 2022.

A business owner who is also employed by a second company and participating in its 401(k) plan should bear in mind that his limits on elective deferrals are by person, not by plan. He must consider the limit for all elective deferrals he makes during a year (source: plans).

IRAs: If you’re in a competitive field and want to attract the best talent, you might need to offer a retirement plan, such as the three described above. However, employers are not required to offer retirement benefits to their employees. If you don’t, one way you can save for your own retirement without involving your employees is through a Roth or traditional IRA, to which anyone with employment income can contribute.

You can also contribute to an IRA on your spouse’s behalf. Roth IRAs let you contribute after-tax dollars and take tax-free distributions in retirement; traditional IRAs let you contribute pretax dollars, but you’ll pay tax on the distributions. The most you can contribute to an IRA in 2023 is $6,500 or $7,500 if you’re 50 or older (source: plans).

*All examples are hypothetical and were used for explanatory/educational purposes only.


Roger S. Barnes, CMFC®, CRPC® | First Financial Group of the South | A Wealth Management Practice

As a team, First Financial Group of the South’s combined experience represents over 150 years in the financial services industry. Roger has completed course work with The American College in Bryn Mawr, Pennsylvania. He holds the College for Financial Planning CHARTERED MUTUAL FUND COUNSELORSM and CHARTERED RETIREMENT PLANNING COUNSELORSM designations. His registrations include Series 6, 22, 63, and 7, and he is licensed in Alabama, Florida, Georgia, Indiana, Massachusetts, Michigan, Montana, New Mexico, Pennsylvania, Tennessee, Texas.  

Roger S. Barnes is a registered representative and investment advisor representative with Lincoln Financial Advisors Corp., a broker/dealer (member SIPC) and registered investment advisor offering insurance through Lincoln affiliates and other fine companies. This information should not be construed as investment, legal, retirement or tax advice. First Financial Group of the South is a marketing name for registered representatives of Lincoln Financial Advisors Corp. 320 Pelham Ave Ste 405 Huntsville Al 35801 CRN-5400330-010623