Individual retirement arrangements are tax-deferred savings accounts. Judgment creditors hold legal claims against a debtor's assets and have the right to satisfy a judgment by garnishment of any assets, including an IRA. Both federal and state laws govern whether a debtor's IRA is exempt from judgment. Whether an IRA can be garnished depends on the type of judgment the creditor seeks to satisfy.
Protections During Bankruptcy
In bankruptcy, federal law governs the use of an IRA to repay a judgment. In 2005, the enactment of the Bankruptcy Abuse Prevent and Consumer Protection Act exempted up to $1 million of an individual's IRA funds from federal bankruptcy judgments. Therefore, during a debtor's federal bankruptcy proceedings, creditors can garnish IRA funds solely to the extent that the IRA's worth exceeds $1 million.
No Federal Exemptions
Outside of bankruptcy there are no other federal exemptions protecting IRAs from garnishment; accordingly, IRAs can be used to satisfy federal debts. The Internal Revenue Service can levy against IRAs to satisfy outstanding income tax obligations.
State Blanket Protections
Certain states protect IRAs from garnishments by any creditor, except the IRS, regardless of the type of debt. As of 2012, New Jersey, Connecticut, Iowa, Kansas and Illinois extend a blanket protection to IRA accounts from claims by creditors.
Domestic Relations Judgments
Many states lift the exemption from garnishment of IRAs where judgments are related to child support, alimony or other domestic relations obligations. In Kentucky, Louisiana and Colorado, IRA funds can be used to satisfy a court order for collection of unpaid child support. Wisconsin law allows the use of IRA funds to satisfy child support arrears, as well as judgments in annulment, legal separation or divorce.
Debtors and Dependents
Some state laws exempt IRAs from garnishment by creditors to the extent the funds are necessary to support the debtor and his dependents. In Minnesota, IRA amounts exceeding $30,000 can be garnished unless they are necessary to support the debtor and his spouse and dependents. Georgia, Nebraska and South Carolina offer an exemption for monetary amounts used to support the debtor and his dependents without imposing a monetary limit.
Under the Internal Revenue Code, early withdrawals from an IRA usually result in an early withdrawal penalty equaling 10 percent of the total withdrawal. If the withdrawal is carried out in connection with a collection action by the Internal Revenue Service, the 10 percent penalty does not apply. All other garnishment actions will be subject to the 10 percent early withdrawal penalty.
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