Roth IRAs are individual retirement accounts that resemble traditional IRAs, except that Roth IRA contributions are not tax-deductible and only specified "qualified distributions" are tax-free. Roth IRAs are considered personal assets and may be used to satisfy legal judgments (claims by creditors). Federal law partially protects Roth IRA contributions from attachment to repay a debtor's judgments. State law regarding judgments against Roth IRAs varies by jurisdiction.
Partial Federal Protection From Judgments
Federal bankruptcy laws (particularly the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act) partially shield Roth IRAs from judgment creditors. If a Roth IRA holder files for bankruptcy, solely the amount exceeding $1 million will be susceptible to claims from judgment creditors. The protection is valid only in bankruptcy proceedings, and all funds exceeding $1 million may be used to satisfy a judgment.
Judgments are creditor claims against a debtor's assets. Judgments can arise in many settings outside of bankruptcy, including in claims for child support, spousal maintenance and credit card debt. Therefore in states where no protections are in place to hinder judgments against Roth IRAs (Alabama, Georgia, Indiana, Montana, Nevada, West Virginia and Wyoming), those funds are subject to repay judgments without restriction.
Amounts Beyond What Is Necessary to Support the Debtor
Many states limit the protection against judgments to amounts necessary to support the debtor and her dependents. While states like Nebraska do not give a monetary limit, Minnesota specifies a total of $30,000 for the exemption with additional amounts as are necessary to support the debtor, spouse and dependents. All amounts exceeding what is necessary to support the debtor can be used to satisfy judgments against the debtor.
Recent Contributions Preceding a Bankruptcy
Hawaii, Pennsylvania and Utah permit recent contributions to a Roth IRA to be used to satisfy a judgment if those contributions preceded a bankruptcy. In Pennsylvania and Utah, any funds contributed one year prior to the debtor's bankruptcy filing may be used to satisfy a judgment. Hawaii permits all contributions for three years prior to the filing to be attached to satisfy a judgment.
- final judgment image by Keith Frith from Fotolia.com