The federal government doesn't want creditors seizing your retirement accounts and forcing you to retire broke. If you own a 401(k) or other workplace plan, federal law completely shields it from creditors, even if you roll it over into an IRA. Individual retirement accounts get some protection from federal law and some from state law. In New Jersey, most creditors have no chance of tapping your IRA.
If you file Chapter 7 bankruptcy in New Jersey, a court trustee will sell off your assets to pay your creditors. Federal law exempts some assets including over $1 million in IRA contents; New Jersey bankruptcy law exempts all of your IRA. You can choose the federal or New Jersey exemption list, but it's all one or the other -- you can't mix and match the best exemptions from each.
Creditors don't have to rely on bankruptcy to get their hands on your assets. If a creditor sues you and wins, he can access your bank accounts, garnish your wages -- but he can't lay a finger on your IRA. New Jersey, like many states, protects retirement accounts 100 percent from creditors. New Jersey applies this rule not only to traditional and Roth IRAs, but other types as well, such as SEP-IRAs.
If your ex-spouse owes you alimony or child support, you may be able to get the money you're owed out of his IRA. In New Jersey's 1981 Mallory v. Mallory case, the judge ruled that an IRA is supposed to benefit the account owner and his family both. That justifies an ex tapping the account for the unpaid support. Like other forms of garnishment, you have to get a judgment confirming you owe the money and a court order that authorizes the withdrawals. Your ex may have to pay tax on the withdrawals.
If you owe the IRS money and don't pay, it can levy your assets to collect -- and that includes your IRA, in New Jersey or anywhere else. You pay tax on the withdrawals, but no penalty for early withdrawal. Although other creditors can't typically get money out of your IRA, one you've begun withdrawing money from the account, those funds are fair game. Money you've taken out of an IRA is considered income, and it's perfectly legal for creditors to lay hold of it.
- New York Times: Protecting Retirement Accounts From Creditors
- Justia: New Jersey Bankruptcy Exemption Statutes
- Kevin A. Pollock: SEP IRA is a Protected Asset in NJ
- Chamlin, Rosen, Uliano and Witherington: The Invasion Of Pensions, Retirement Plans, And Iras For Alimony And Child Support Obligations
- Internal Revenue Service: Traditional IRAs
- Nolo: Your Retirement Plan in Bankruptcy