Are My Retirement Accounts Protected From Judgment Creditors in California?

If you live in California and a creditor gets a judgment against you, that judgment creditor may be able to collect from your retirement account. In California, some retirement accounts are protected (such as 401ks and profit-sharing plans). Others are more vulnerable to judgment creditors (such as IRAs). A judgment creditor's ability to get your retirement account in California will depend on what type of retirement account you have and how much you have in it.

(Learn about other ways that judgment creditors can collect from your income and assets.)

Federal Protection for ERISA-Qualified Retirement Accounts

Federal law prohibits judgment creditors from going after money in a pension plan that was set up under the Employee Retirement Income Security Act (ERISA). To be protected against creditors, your ERISA account must be either a qualified retirement plan or an employee welfare benefit plan covered by ERISA.

Examples of ERISA-qualified pension plans and benefit plans covered by ERISA include:

• 401(K) accounts
• pension and profit-sharing plans
• group health and life insurance plans
• dental and vision plans, and
• HRAs, HSAs, and accidental death or disability benefits.

There are circumstances when a judgment creditor may be able to get to your ERISA account, such as for a domestic relation order for spousal support or child support (called a "QDRO"), or an IRS tax garnishment.

To learn more about ERISA-qualified retirement accounts, their protection from judgment creditors, and the exceptions to that protection, see Can Judgment Creditors Go After My Retirement Accounts?

Less Protection for Non-ERISA Accounts in California

If your retirement account is not qualified or covered by ERISA, then a judgment creditor could potentially seize it. That is because some non-ERISA accounts in California do not have the same protections as ERISA accounts.

Types of non-ERISA accounts that may be vulnerable include:

• IRAs, Roth IRAs and SIMPLE IRAs
• SEP and Keogh Plans
• 403(b) plans for employees of a public school or university
• plans that do not benefit employees, or "employer-only" plans, and
• government or church plans

"Amount Necessary For Support" Is Protected

California law allows you to exempt the amounts of your IRA and other non-ERISA accounts that are necessary for the support of you and your dependents at the time you retire. There is no single rule that applies to everybody's retirement accounts. Rather, courts decide how to divide your retirement account between you and a judgment creditor based on your particular circumstances.

Typically, a California court will ask these two questions:

• Do you need the retirement funds now, and if so, how much?
• Will you be able to replenish those retirement funds if they are awarded to the judgment creditor?

In reaching an answer to each of those questions, the court will likely consider the following factors:

• your present and future income
• your present and future living expenses
• your age and health
• your ability to continue working and make a living (including trade skills and education level)
• your ability to save more money for retirement, and
• any special needs of you or your dependents.

Example. If you have a $150,000 IRA, you may not be able to keep it if you are 40 years old, healthy and employed, have no dependents, and earn $60,000 a year. However, you may be able to keep that same account if you are 65 years old, suffering from a heart condition, and unemployed.

Additional Roll Over Protection

If you roll over funds from an ERISA account or PRP into an IRA, those funds remain 100% exempt. This is the case even though the IRA is not fully exempt in California. As long as you are able to prove that the funds in your IRA originally came from an ERISA account or PRP, then you do not have to go through the "necessary for support" test.

California Protection for Private Retirement Plans

If your pension plan does not fall under ERISA, but qualifies as a "private retirement plan" (PRP) under California law, then it may be fully protected. Unlike with an IRA, you do not have to prove that the funds are necessary for your support.

To qualify, the PRP must be set up as an employment pension plan, with written rules restricting access to the funds, much like an ERISA account. You cannot just deposit a single large lump sum of your own money or roll over your IRA funds into a PRP. Instead, a PRP is a retirement savings plan available for individual employees whose employers do not offer pension plans or other ERISA accounts. The PRP must be used for retirement purposes and you cannot casually transfer funds in and out of the PRP. If you use PRP funds prematurely and for non-retirement purposes (such as paying personal debts and expenses) then it may lose its exempt status.

Other Ways to Protect Your Retirement Accounts in California

If you live in California and have a non-exempt, non-ERISA retirement account that a judgment creditor is trying to attach, you might consider filing bankruptcy. Bankruptcy laws may allow you to protect up to $1 million in your IRA, while still affording you relief from your creditors. To learn more, including whether you qualify for bankruptcy protection, visit Nolo's Bankruptcy topic area.