Many people do not understand how IRA plans work. One area of confusion is about creditors having access to your retirement funds. Here are the basics of IRA plans and how creditors can affect them.
IRAs and Creditors
Many people face a debt problem at some point in their lives. A debt settlement, or bankruptcy, could affect your credit and compromise assets. During these processes, a judge could decide what happens to your assets and your financial situation. The courts and creditors can garnish your wages to pay a debt or provide a judgment. When this happens, most of your assets are fair game. However, one thing that is not available is your retirement account.
The government has given special protection to tax-advantaged retirement accounts. IRAs, 401k's, 403b's and other similar programs are not eligible to be touched by your creditors. The government provides a special status for these accounts and they will remain yours regardless of what happens with your creditors and any judgments against you.
One way in which your retirement funds could be compromised is if you file for divorce. If you have a retirement account and you divorce, they could be entitled to some of the money in the account. The judge will look at the entire asset situation and make a determination as to what will happen with your retirement account. They could require it to be cashed out and split evenly among both parties or it could remain in tact.
Federal Tax Lien
The Federal government is the entity that gave you the protection for your retirement account. Therefore, they can revoke that protection if you owe them money. If you do not pay your taxes and get a Federal tax lien placed against you, the government could come in and take money out of your retirement account to pay the debt. With this in mind, you should know that this only applies to the Federal government. State governments can not go into your retirement accounts and take money for state tax liens.
With this knowledge, you should use it to your advantage if you are facing looming debt problems. If you know that you are going to have to settle a debt or file for bankruptcy, you should consider maxing out your IRA contribution for the year. If you are under the age of 50, you can put in up to $5000 per year in your IRA. If you are over 50, you can put in $6000. Therefore, if you know that you are going to have to give a good percentage of your assets and money up, you might as well put it in an account that your creditors can not touch. You will not have access to it until you turn 59 1/2, but at least it is still in your possession.