Are 401(k)s Protected from Creditors?

What Is a 401 K Plan? 

 A 401(k) plan is a tax-deferred retirement savings plan named after Section 401(k) of the U.S. Internal Revenue Code. A 401(k) plan that allows you to defer taxation of a certain portion of your wages to an individual account and defer taxation of account earnings. Employers can match your 401(k) plan contributions.

Money in your 401(k) plan is subject to income tax only after you withdraw contributions and earnings.

Federal Protections of Your 401(k) Plan Account

Money and securities in your 401(k) plan are protected from civil creditors. Your 401(k) is governed by provisions of the federal ERISA laws. Most ERISA plans have creditor protections so long as they comply with formal ERISA requirements.

For example, contributions to your 401(k) in excess of ERISA ceilings may not be protected. There are ERISA exceptions from creditor protection such as tax debt and domestic orders for alimony and child support.

Florida’s Protections of 401(k) Plans

Florida law provides enhanced protection of 401(k) accounts.

Florida Statute 222.21 contains a list of assets exempt from creditor collection in Florida. Tax-qualified plans under IRS Code 401(k) are included in the list of exempt assets. Florida law includes protection of solo retirement plans as well as inherited 401(k) accounts.

Are Withdrawals From 401(k) Accounts Protected From Creditors?

Clients facing civil judgments often ask us whether their cash withdrawals from their 401(k) plan remain protected from their creditors. We explain that ERISA does not protect 401(k) distributions, and under ERISA a creditor can garnish 401(k) funds deposited in your bank.

In Florida, the answer is unclear. Several Florida court decisions extended the statutory exemption of 401(k) plans to plan withdrawals to the extent money in a financial account is traceable to the 401(k).

There are, however, a minority of Florida courts have disagreed and denied protection.

We advise our clients that 401(k) money remains protected if withdrawals are deposited into an otherwise creditor-protected account. Your deposits of 401(k) withdrawals into a tenants by the entireties bank account are protected from garnishment to collect judgments against you or your spouse individually.

Another option is to deposit money in bank accounts that legally cannot be garnished.

Summary of 401(k) Creditor Protection

Federal law and Florida law afford your 401(k) plan protections from judgment creditors. To maintain protection, you must ensure that your plan complies with IRS rules, including contribution limits.

401(k) money may lose its protection after it is withdrawn, but there are other legal tools to maintain creditor protection.