Though some states protect IRA savings from garnishment of any kind, most states lift this exemption in cases where the account owner owes child support.
Unlike 401(k) plans or other qualified retirement savings accounts covered under the Employee Retirement Income Security Act of 1974 (ERISA), individually owned IRA accounts are not automatically protected from garnishment by creditors. If you are court-ordered to fulfill a debt, including the payment of overdue child support, your IRA counts as an asset that may be used to satisfy that debt. Though there are some situations in which your IRA may be exempt from garnishment, failure to pay child support is generally not among them.
The degree to which IRAs are protected from garnishment is determined largely by state governments. The federal government does have its own system of exemptions, but states are allowed to choose between adhering to federal regulations or creating their own systems.
Most states choose to develop their own systems of exemptions, meaning that the specific protections offered can vary greatly depending on your state of residence.
Under federal law, there is no protection for IRA funds except in the case of bankruptcy. The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005, provides protection for up to $1 million of your IRA savings if you declare bankruptcy.
However, states have the final say in what bankruptcy regulations apply to their residents. This means that the BAPCPA $1 million exemption only applies if your state of residency allows you to choose between the state-specific exemption system and the federal exemption system. In some states, residents do not have a choice between state and federal exemptions.
Aside from this partial bankruptcy exemption, IRAs can be garnished to fulfill any federal debt, including debts to the IRS for overdue taxes.
Most states offer some form of limited protection for IRAs. In the event of bankruptcy, for example, many states exempt any IRA funds deposited more than 120 days prior to a bankruptcy filing. In Minnesota, only IRA funds in excess of $30,000 may be garnished to satisfy creditors. Your IRA funds may also be exempt from garnishment to the extent that they are necessary to support you and your dependents, though some states cap the maximum amount of IRA funds that can be considered 'necessary'.
Though there are a number of possible exemptions protecting your IRA from creditors, many states lift these exemptions in the case of domestic relations judgments. Garnishment to satisfy child support obligations is the most common exception to these protections. In many states – including Kentucky, Colorado, Wisconsin and Louisiana – IRAs are offered no protection from collections related to overdue child support. Judgments relating to alimony, divorce, annulment or legal separation are also common exceptions to state exemption laws.
Kansas, Connecticut, Illinois and New Jersey are a few of the states that offer blanket protection for IRA retirement savings. In these states, your IRA cannot be garnished for any reason, even if you owe overdue child support.