Can Anyone Touch My 401(k)?

When it comes to asset protection, assets in 401ks are among the safest vehicles around.

safe image by Stuart Corlett from

401k plans are considered "qualified" employer-sponsored retirement plans, meaning they are covered under the Employee Retirement Income Security Act of 1974. These plans, like other pension plans, receive substantial asset protection against creditors under federal law. It is extremely difficult or impossible for creditors to seize assets in 401k plans to satisfy a debt. There is, however, an important exception for "solo" 401k plans popular with sole proprietors.

Mechanics of Collection

If you owe money to a creditor, he may take you to court to force you to pay. If the judge agrees, she may issue a judgment ordering you to pay the delinquent amount, plus possible interest and penalties. Creditors may then go back to the court to pursue a "charging order" against specific assets. This allows the creditor to seize assets to satisfy the debt. But 401k plan administrators have a fiduciary duty to plan sponsors not to release funds for any purpose other than for the benefit of the plan participant. The funds, technically, don't belong to you and are not your personal asset. Instead, your contributions are held in trust on your behalf. Courts may seize your own assets, but they cannot seize assets that are not held in your name to satisfy your personal debts.

Assets vs Income

While assets held within 401k plans receive virtually unlimited creditor protection under federal law (except from the Internal Revenue Service, as described below), they lose that protection when they are taken out of the plan and distributed as income. A charging order cannot force a 401k plan administrator to break up a plan, but a court order could force the plan administrator to send income to the creditor once the account owner starts taking distributions.

IRS and Child Support

In some cases, the IRS can penetrate the creditor protection normally afforded 401ks against regular creditors and levy assets within 401k and other retirement plans. Specifically, if you can elect to take a distribution from the plan, the IRS is capable of seizing it. On the other hand, if your employer will not allow you to withdraw assets early or while in service with the company, the IRS cannot override that restriction. Their access to the money is the same as yours. Some states also make exceptions for child support claims.

Solo 401ks

Solo 401k plans -- streamlined, simplified 401ks designed for small businesses and sole proprietorships with only one or two employees -- don't receive the same level of protection under federal law. The level of protection a solo 401k enjoys is a function of state law, and some states grant more protection to solo 401k plans than others.

Other Wealth-Protection Options

Depending on your state, there may be other creditor-protected options for your assets. They include IRAs, which enjoy up to $1 million in protection under federal law (some states provide higher limits); home equity in your primary residence; annuities; and cash value in life insurance policies. However, beware of "fraudulent transfer" or "fraudulent conveyance" rules. If a lawsuit is under way or imminent and you transfer assets from a non-protected asset to a protected one, the court may disallow the transfer and you could still be liable for damages.