Are Withdrawals from Retirement Accounts Protected from Creditors?

Most withdrawals or distributions from retirement accounts can be protected even after being deposited into a bank account. The protection is dependent on state law and proper asset protection design.

IRA, Pension and 401k Retirement Plans

Retirement accounts are generally protected from creditors under Florida law. Florida statute 222.21 protects IRAs, 401k plans, and other tax-qualified plans.

If a judgment debtor owns any of these accounts, the creditor cannot reach money so long as it is held within the plan.

Withdrawals

In most cases, withdrawals from these plans are deposited in the retiree’s personal bank account. Does the same statutory protection apply to withdrawals from retirement accounts?

Florida case law is unclear. Courts in some decisions have held that retirement funds remain protected even after being deposited into a bank account. But other courts have held that certain withdrawals, particularly from IRA plans, did not remain exempt after being deposited into a bank account. 

Retirement and pension funds are more likely to retain exempt status if the money represents distributions that are required by tax law or by a pension plan contract. Maintaining retirement distributions in a segregated account where all money is either accumulated retirement money or funds exempt by other law (e.g. social security) also increases the likelihood of exempt status.

Even if a judgment debtor comingles retirement account withdrawals with other, non-exempt funds, there are court decisions that state that the debtor is still entitled to a hearing to claim an exemption on a portion of the account. Still, the better practice is to hold exempt retirement funds separate from non-exempt funds.

Some clients have run into issues when they withdraw money from a retirement account, deposit it into a segregated checking or savings account, and then further transfer it into another checking or savings account. Further transfers of retirement distributions make it harder to trace the funds to the retirement account and diminish protection.

ERISA Protection

Certain retirement accounts are protected from creditors under federal law. The withdrawal of funds from these federally protected accounts probably loses federal protection. In other words, the federal protection provided by ERISA does not extend to funds in the bank account, even if clearly traceable to the source.

However, Florida law may protect the funds withdrawn from the ERISA plans if deposited into a segregated bank account.

Protecting Pension and IRA Distributions From Garnishment

A writ of garnishment against the debtor’s bank is the creditor’s primary remedy to collect distributed IRA and pension proceeds that have been deposited in the debtor’s personal bank account. The best protection of retirement distributions is achieved by holding the funds in bank accounts that cannot be garnished under applicable state law.

Whether or not IRA and pension distributions are deemed to retain their exemption under Florida Statute 222.21, the proceeds are effectively protected if the applicable state law does not permit the creditor to garnish the particular bank where the money is held.

Annuity Proceeds

Annuity withdrawals are protected after being deposited into a bank account. The annuity statute expressly protects both annuities and annuity proceeds without exception for where the proceeds are maintained after distribution.